BNY Mellon: The Aerial View: Brexit - Sentiment Erodes

23 okt 2018

By Simon Derrick, Chief Currency Strategist

•             European response to UK's latest backstop proposal proves frosty•             Growing tensions within Conservative Party complicate the picture•             Market increasingly cautious about GBP outlook from late December onward

Here’s a round-up of the latest developments:

The Irish Border IssueBoth the EU and UK remain committed to avoiding a hard border between the Republic of Ireland and Northern Ireland. However, the two sides have very different views on the backstop arrangement needed should no solution to the issue be found.

The EU proposes keeping Northern Ireland within the EU’s single market and customs arrangements until the issue is resolved. The UK is opposed to this idea.

To try and break the impasse UK Prime Minister Theresa May proposed extending the period that Britain remains under EU law to allow more time to strike a trade deal with Brussels.

This idea was promoted over the weekend by Brexit minister Dominic Raab, who wrote that Mrs May was now "considering extending the implementation period for a limited period of a few months, as an alternative to the backstop".

Response from France, Ireland and the EUThe response from parts of Europe to Mr Raab's comment was robust. France's Europe Minister Nathalie Loiseau stated: "We have to have a definitive answer or at least no temporary measures (to fix the Irish border issue) which disappear and we don't know what to do after that."

Ireland's Foreign Minister Simon Coveney was blunt: “There will be no withdrawal agreement without the backstop, end of story".

The response for the EU's chief negotiator remains to be seen. The only clue so far has been a report this morning that he might be prepared to change some of the wording in the agreement without actually impacting the legal effect.

UK PoliticsOpposition from Eurosceptic Conservative MPs - particularly to the idea of an extended transition period - has been strong with warnings in the UK press about a rebellion against the prime minister.

One focus appears to be a meeting on Wednesday of the 1922 Committee, with talk that the 48 letters needed to trigger a no confidence vote within the party could soon be reached (it should be noted that the PM's spokesman said yesterday that she had yet to receive an invitation to this meeting).

Were this to happen then the chair of the committee would consult with the prime minister and determine the date of a confidence vote. Victory would be determined by a simple majority.

In addition, a series of amendments had been put down for the Northern Ireland Bill to be read on Wednesday, which would have potentially blocked officials from putting any trade or regulatory barriers between Northern Ireland and the rest of the UK. However, these amendments were withdrawn late on Monday. Although the amendments would have been unlikely to pass (the Labour Party was expected to abstain from the vote), it's worth noting that the DUP said it would have backed them.