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GBPUSD slips on Brexit and COVID-19 uncertainty

calendar 18/10/2020 - 17:36 UTC

GBPUSD closed around 1.2913 in the U.S. session Friday, ticked down -0.01%, almost flat despite no free trade agreement (FTA) as the U.K.-EU may sign an alternative ‘Australia’ (AU) type of deal instead of ‘Canada’ type deal. Overall, GBPUSD slips almost -1.02% for the week on Brexit and COVID-19 uncertainty as Britain is now under partial corona lockdown 2.0.

On Friday, the British PM Johnson, in his official statement repeatedly pointed out about not being treated fairly by the EU despite 45-years of membership. Johnson also said there is a fundamental question of sovereignty as the EU wants to control Britain’s fishery and certain other sovereign issues, which an independent nation can’t allow. Johnson said Britain’s 1st option was a ‘Canada’ (CA+) style free trade deal with the EU, but that was not possible because of the EU hard stance.

Now Britain wants to sign the ‘AU’ type of trade deal with the EU as the last viable option because the U.K. can’t afford more Brexit uncertainty with barely 10-weeks left for the end of the transition period (31st Dec’20). Johnson said it was therefore important that businesses prepare to trade with the EU based on arrangements that are more like Australia’s, based on simple principles of global free trade. This is equivalent to exiting the EU under an almost normal WTO trade deal; i.e. no FTA at all.

Normal WTO tariffs would be applicable between EU-U.K. after Brexit against free trade. For the U.K., imported costs of consumer goods (like cars) and many food items may surge by an additional 10%, while there may be relocation for some manufacturing as-well-as service industry to the EU to avoid higher tariffs.

Johnson also said despite 45-years of membership, the EU didn’t offer the same trade deal for the U.K., it offered to Canada. Thus now the U.K. is trying for an AU type of trade deal, although Johnson also said if the EU changed its fundamental approach, the U.K. will be happy to negotiate further for an FTA with the EU: What we're saying to them is come here, come to us if there's some fundamental change of approach”.

As per reports, Johnson, who was supposed to extend the negotiation with the EU after his 15th Oct deadline to avoid a no FTA exit from the EU, suddenly took a tough stance after French PM Macron told EU leaders that his British counterpart (Johnson) must accept the EU condition. The EU has proposed a further two to three weeks of negotiations but added that Britain must make the first move.

Macron accused Johnson of using fisheries tactically and insisted it was not his job to make the British PM happy, but Macron also acknowledged that the post-Brexit arrangements for British seas would not maintain the status quo for the EU fishing fleet:

If there is a deal, it must allow us to define the modalities of access for our fishermen to British waters--Will the situation be the same as it is today? No, it will not, that’s for sure. Our fishermen know it. We know that too. We are going to help them. We need to have a compromise on access, but we know it will not be of the same nature. It won’t be as ambitious. It will come with conditions, perhaps we will have to pay for it.”

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The EU negotiator Barnier said he would come to London on Monday to start the new round of talks, especially on fisheries, governance, and level playing fields. A European Commission spokesman said:As agreed during this week’s negotiations, Michel Barnier held a videoconference today with his UK counterpart David Frost to discuss next week’s negotiations. Both chief negotiators agreed to talk again on Monday to discuss the structure of these talks.”

But Frost had told Barnier on Friday afternoon that there was no need to come to London next week as there is ‘no basis for negotiations in London as of Monday’ unless the EU came up with a new plan over the weekend.

Frost tweeted: “Disappointed by the EUCO conclusions on UK/EU negotiations. Surprised EU is no longer committed to working ‘intensively’ to reach a future partnership as agreed with Vonder Leyen on 3 October. Boris Johnson will set out UK reactions and approaches tomorrow in the light of his statement of 7 September. Also surprised by the suggestion that to get an agreement all future moves must come from the UK. It's an unusual approach to negotiating”.

After Johnson’s official statement, his spokesman hardened the stance further: The trade talks are over – the EU has effectively ended them yesterday when they said they did not want to change their negotiating position---only any point in Michel Barnier coming to London next week if he undertook talks on the basis set out by Johnson, discussing all areas of contention and working on legal text.

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