Talks look set to continue through the weekend
A late hiccup yesterday brought the pound lower in the closing stages, as cable slipped away from 1.3500 but has been consolidating around 1.3450 since.
There isn't much update since then, so let's try to assess the Brexit state of play ahead of European trading today for a better sense of how things are playing out.
What is the current mood music surrounding Brexit talks?
The reports from yesterday suggest that prospects of a deal are "receding" as both sides are still failing to reach a middle ground when it comes to the key outstanding issues.
There is talk that the level playing field issue is turning into a key sticking point but much of this could still be political posturing as both sides try to stretch the limits in getting to a deal. At this point, they seem content to let it run for a few more days.
So, what happens next?
Any hopes of a material breakthrough today are likely to be slim, but we'll see how things go as Barnier is expected to return to Brussels to update on how things are progressing. He is then expected to return to London for more talks through the weekend.
The initial expectation was that this should be a formality before a deal is wrapped up, but now it looks like we could be in for more political posturing. Although, this might still be part of the political theater both sides are trying to sell.
Is a Brexit deal still likely at this stage?
To make things simple, both sides will surely want this to end with an agreement of some sorts, regardless of what that may be. It is an assumption that should not be taken for granted but it makes sense given what and how much is at stake for both parties.
As much as the key outstanding issues are still causing a bottleneck, I would still argue that we may end up with some technical agreement that isn't really a deal:
Otherwise, we are likely to see the can kicked down the road again and I firmly believe that at the end of the day, both sides will fall back on some technicality to sell a compromise.
A skinny deal excluding the three key outstanding issues (instead postponing them) will allow Boris Johnson to "technically" stick with a Brexit on 1 January 2021 while the EU doesn't have to move its red lines and be made to look worse off from any deal.
The price action in the pound since last week also reflects that sentiment, as even the late news yesterday failed to really take the pound down a notch or two.
But that also reveals the risk in the pricing of a "deal" at this point in time.
If both sides decide to threaten and walk off (perhaps temporarily), that could well drag the pound much lower with cable at risk of returning to its 100-day moving average (1.3060) and 1.3000 initially before targeting a further push lower.
On the flip side, a firm break above 1.3500 and the December 2019 high of 1.3514 clears the path for a move towards 1.4000 potentially but not without its caveats. It will come down to what form of a "deal" is presented at the end of the day.
In such a scenario, the devil will be in the details and the market should eventually focus on that once the euphoria settles down that is.
