Pound/dollar is at its highest level in two months, settling above the 1.34 level after posting a high at 1.3430. The driver is clear: reports about the UK agreeing to high divorce bill. This, in turn, unlocks the next stage of the talks regarding future negotiations.
Yet perhaps Christmas came too early for the pound. The divorce bill is only one of the divorce items. There are two additional ones: citizens’ rights and the Irish border.
The Irish issue is becoming more serious. While the government in Dublin averted a collapse following the resignation of a top official, the border is becoming a problem.
An Irish minister said that the government cannot accept a return to a hard border. That would undo the Good Friday agreement and open wounds from the days of the Troubles.
The British government would like to talk about the topic as part of the final agreement. It does make some sense: the decisions about a border or no border depend on the existence of a free trade agreement or lack thereof.
But Ireland wants a higher level of certainty and it has a de-facto veto on the next phase of talks.
Is the divorce bill fully settled?
Reverting back to the divorce bill, things aren’t that clear there as well. Chief EU negotiator Michel Barnier did not say there is a deal, just progress. So, everything seems to be up in the air. The early report may have been too optimistic. The negotiations “are not finished yet” said the Frenchman.
Barnier, speaking in Germany, added that there are conflicts about the ECJ, Ireland and other not-so-optimistic words.
The EU is treating the UK like Greece – 5 similarities
If there are no breakthroughs on these two issues, it is hard to justify the rise of the pound. At current levels, support awaits only at 1.3340, followed by 1.3270. Further support awaits at 1.3220. All these levels were visited just yesterday before the optimistic news broke.
On the top side, 1.35 is the big hurdle, and the still existing uncertainty probably prevents Sterling from taking that extra step.
More: GBP: Where To Position Ahead Of The Important EU Summit On Dec 14-15 – Nomura