UK Brexit Concession Drives Sterling Higher

May Concedes Ground

There has apparently been a breakthrough in the negotiations for the UK to leave the EU in March 2019. It seems, according to most newspapers, that the UK has conceded that the amount it should pay as its contribution to the EU budget should be between forty and fifty-five billion Euros. This is a huge increase over the twenty billion offered by Theresa May in September but comes much closer to confirming her comment that the EU should be comforted that the UK with “pay every cent it owes”.

This concession has apparently been widely welcomed in Brussels although a note of caution was raised that this is only one of three issues that need to be considered before stage two of the talks can begin.

Traders were prepared to take the news at face value and the pound rallied to test resistance at 1.3390 and 1.1300 versus the dollar and single currency respectively. A more concrete statement from the EU accepting the U.K.’s proposal will be needed for the pound to rally further given the strong resistance it faces at 1.3450 against the dollar and close to 1.1400 versus the Euro.

Considering your next transfer? Log in to compare live quotes today.

Carney boosts banks but Brexit concerns resurface

The Bank of England Governor Mark Carney yesterday released the report into the stress tests that banks have been facing over the past few months and announced that all U.K. banks passed, meaning that they have sufficient capital to withstand any foreseeable upheaval to their business model. However, he went on to speak of his concerns over the effect of a “disorderly Brexit” on banks and warned that they would need to raise more capital in such an event.

Until the increase in the financial offer made yesterday by Theresa May a hard Brexit was starting to look more likely and it is by no means certain that it still won’t happen.

Carney is concerned over the effect on the U.K. economy of a hard Brexit commenting that unemployment would rise, as would interest rates and a “significant” fall in the pound would drive inflation higher. It has already been said that such a move would knock one to one and a half percent off growth which would mean that the U.K. would fall into recession. This would raise the spectre of “stagflation” where the economy would be shrinking but prices would still be rising.

Brexit reaching a crucial stage

The size of the concession apparently made by the U.K. Government, while supposedly well received by Brussels, may also weaken their bargaining position when the other two issues are discussed and particularly when talks move to stage two.

It has been a feature of the talks that the EU has always believed that they have the stronger bargaining position although this remains to be seen. There has been little said about the economic effect of Brexit on the EU but, while not as dramatic as the effect on the U.K., it will still be significant.

There have been rumours circulating this week of a concession over the treatment of EU citizens remaining in the U.K. after Brexit although following the offer over the budget this is less likely to have been agreed by Cabinet hardliners. The Irish border question remains a sticking point which could have serious ramifications going forward. Dublin has said it will veto an agreement which leads to a hard border and Belfast could withdraw its support for the minority Westminster Government should concessions to Dublin be seen as too generous.

The pound will be driven solely by Brexit for the foreseeable future with potential just as great for a fall to 1.05 versus the Euro as a rally to 1.2000 as every aspect of the U.K. economy will be affected.