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GBPUSD under stress on renewed Brexit uncertainty

calendar 10/09/2020 - 16:15 UTC

GBPUSD closed around 1.3000 in the U.S. session Wednesday, ticked up almost +0.10% on less hawkish COVID-19 mitigation protocols from the British PM Johnson. Earlier the Cable (GBP) made a 6-weeks low of 1.2884 after the British government said its new Internal Market Bill would break international law ‘in a very specific and limited way’, raising concerns over a no- FTA deal Brexit. The new British bill, if approved, would give ministers the power to dis-apply parts of the Northern Ireland protocol of the Brexit Withdrawal Agreement by modifying export declarations and other exit procedures.

On Tuesday, the head of the UK’s government’s legal department Jones resigned amid disagreements with the attorney general over plans to override parts of the deal on Northern Ireland. While the EU insists that London must stick to its obligations under international law, Britain has warned Brussels that it was ramping up preparations to leave the bloc without an FTA (Free Trade Agreement). The EU is also studying the possibility of legal action against the U.K. over Johnson’s plans to breach the Brexit agreement. The two sides will hold an emergency meeting Thursday (10th Sep). And breaking commitments over the Irish border may also adversely affect Britain's hopes of an FTA with the U.S.

Johnson said in the British Parliament he plans to ‘press on’ with proposed legislation for ‘technical reasons’ that explicitly acknowledges his government could break international law by ignoring some parts of the Brexit treaty is signed with the EU last year. Johnson stressed the bill is a legal safety net to protect the U.K. against extreme or irrational interpretations of the Northern Ireland protocol of the Withdrawal Agreement that could threaten peace in the British province. 

On Sunday, Johnson said Britain could walk away from the talks within weeks (15th Oct) as a no-FTA Brexit would be a good outcome for the U.K. Johnson said the country might prosper even if Britain had a trading arrangement with the EU like Australia's.

As of now, the main thorny issues between are EU access to fishing in the British sea coupled with Britain’s state subsidy to industries. The EU is determined to ensure a ‘level playing field’ for the competition so British firms can't undercut the bloc's environmental or workplace standards or pump public money into U.K. industries. Britain accuses the EU of double standards of making demands that it has not imposed on other countries it has FTA with, such as Canada.

The British chief negotiator for Brexit, Frost pointed out Britain is not going to compromise on the fundamentals of having control over its own law: We are not going to accept level playing field provisions that lock us into the way the EU does things.

The EU says a deal has to be struck before November to allow time for parliamentary approval and legal vetting before the transition period expires on 31st Dec’20. Johnson gave an even shorter deadline, saying an agreement needed to be sealed by an EU summit scheduled for 15th Oct: If we can't agree by then, then I do not see that there will be a free trade agreement between us, and we should both accept that and move on.

The EU Brexit negotiator Barnier said last week he was worried and disappointed by the lack of progress and said the U.K. had not engaged constructively. The French Foreign Minister said Sunday that talks were not going well and dismissed British attempts to drive a wedge between EU nations on issues such as fishing; the EU27 remained united against Britain’s old policy of divide & rule: We would prefer a deal, but a deal on the basis of our mandate. There is room for action, but the whole package, including the fishing package, needs to be taken up in order to avoid a no-deal.

The European Commission head Leyen tweeted strong concern about Britain's plans, noting it would destroy trust and undermine trade talks: Very concerned about announcements from the British government on its intentions to breach the Withdrawal Agreement. This would break international law and undermines trust. Pacta sunt servanda = the foundation of prosperous future relations.

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