Monex: 'Make it or Breaxit’

Bart Hordijk

Fasten your seatbelts, forget about the first tier data being released and don’t even bother about the kids, because potentially one of the most decisive UK-EU Brexit summit is due on Wednesday. After the European Union unequivocally rejected Theresa May’s “fudge” solution for the Irish border in her Chequers plan, it will be up to May which bitter pill she will decide to swallow. She can choose between accepting a border in the Irish Sea, effectively keeping Northern Ireland in the customs union, or having a border between Ireland and Northern Ireland, which would condemn the idea of frictionless trade between NI and Ireland directly to the bin of busted beliefs.

Chief European Union negotiator Michel Barnier has said he considers a deal by Wednesday possible, and European Commission President Donald Tusk labelled the summit as a “moment of truth”. Before we reach that moment May will not only have to content with EU negotiators, but also with resistance from within her own party. This puts our poor, most trusted Brexit barometer, the Great British Peso, mercilessly in the middle of all the conflicting parties, which can leave GBP terribly tattered, but also holds the potential for a march of heroic proportions upwards for sterling by the end of the week (chart 1).

The outcome of the UK-EU Brexit Summit on Wednesday and Thursday is uncertain, with incentives for both parties to come to an agreement that would secure good trade relations between the two economies in the future. Nevertheless, as we’ve seen before, Brexit isn’t always about what’s rational and domestic political sentiments determine just as much what May will go for in the negotiations with the EU, as what is rational, or what the EU is willing to give her. The only thing that is certain, however, is that given the seemingly binary outcome of the meeting on Wednesday, sterling will not find itself were it trades now by the end of the week.

Chart 1: Sterling rallied in September when Barnier stated he thinks a deal is possible within weeks, but sold-off after May’s Chequers plan fell in Salzburg