The sterling vs euro interbank exchange rate has risen overnight, and currently stands at 1.1289. This is just -0.67% below the pound’s recent high against the euro, its strongest in 17 weeks, or since May 22nd, reached last Friday 20th September, of 1.1366.
By comparison, back on Saturday 10th August, the pound was as weak as 1.0646 versus the Eurozone’s common currency. So it’s since strengthened by +6.04%.
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One reason why the pound has neared this 17-week high versus the euro today is because it’s been reported that the UK government will unveil its revised Brexit legal text as soon as next week.
Another factor why sterling has strengthened against the common currency is because the UK’s opposition political parties have agreed to work together, to prevent a ‘No Deal’ Brexit.
Pound Euro Exchange Gains, as UK to Reveal Brexit Legal Text
As I mention, one reason why the sterling vs euro interbank exchange rate has risen in the last day is because it’s been reported that the UK government will publish its revised Brexit legal text early next week.
This has lifted the pound, because until now, the UK government has only published “non-papers”, so it’s thought that the UK’s decision to publish a legal text is a step forward.
In particular, The Times broadsheet reports that Prime Minister (PM) Boris Johnson’s minority Conservative government will publish its revised Brexit legal text, for the EU to examine.
The revised text will focus on resolving the Northern Irish backstop. According to The Times, "the proposal is expected to include further concessions to address EU concerns over its plans for the Irish border."
The Northern Irish backstop refers to a proposal in the UK’s current draft Brexit Withdrawal Agreement.
Here, if the UK and the EU are unable to agree a trade deal in future, then to ensure that there’s no hard border between Ireland and Northern Ireland, all of the UK would remain in the EU’s Customs Union.
However, this would prevent the UK from agreeing independent trade deals. The UK government fears that the backstop could render the UK a “vassal state”, out of the EU yet subject to its rules.
So Mr. Johnson’s Brexit negotiations have centred on revising the backstop, to ensure that there’s no hard border between Ireland and Northern Ireland. This is to protect peace there, yet simultaneously allow the UK to pursue trade deals with third-party countries in future.
GBP to EUR Strengthens, as UK Proposes “Customs Clearance Centres”
Ahead of the UK’s publishing its legal text early next week, respected financial news source Reuters has reported that the UK’s Brexit negotiators have floated another proposal to their EU counterparts.
This refers to "customs clearance centres" located five-to-ten miles “back” on both sides of the Irish border, where non-agricultural goods passing between the UK and EU could be examined.
According to a UK government source speaking to The Times, we’ll know if these ideas gain traction, because the UK and the EU will enter a secret negotiating “tunnel”, where information isn’t leaked to the press.
The source said that: "The more you hear, the less likelihood there is of a deal. We’ll know by the end of next week [that the proposals have failed], if we are seeing leaks."
However, because this was presented in the form of a “non-paper”, a non-legally binding text, it’s yet to receive an official EU response. Simon Coveney, Ireland's Deputy Prime Minister, tweeted that:
"Non-Paper = Non-Starter. It's time the EU had a serious proposal from the UK Government if a Brexit deal is to be achievable in October. Northern Ireland and Ireland deserves better."
Meanwhile, Elsa Lignos, a strategist with RBC Capital Markets, said that:
"In a nutshell, it would mean replacing the border with a 'border area' the size of Luxembourg. A proposal in line with the leaked details has already been rejected by Irish political parties north and south of the border and seems unlikely to be the blueprint for a deal." So this bodes ill for the UK’s legal text next week.
That said, even though the UK’s idea for “customs clearance centres” away from the Northern Irish border has seemingly been rejected, the sterling vs euro interbank exchange rate has risen.
This is because the financial markets are treating as a sign of progress in the Brexit negotiations the fact that the UK feels confident enough in its proposals to present these as a legal text soon.
Pound Euro Exchange Rises, as Opposition Agrees to Prevent ‘No Deal’ Brexit
In addition, another explanation why the sterling vs euro interbank exchange rate has gained in value in the last day is because, yesterday, the UK’s opposition parties met and agreed to work together to prevent a ‘No Deal’ Brexit.
It’s thought that this further reduces the probability that the UK will exit the EU without an agreement at the end of the current deadline, of October 31st, reports the BBC.
To explain, on Monday 30th September, the leaders of the UK’s opposition political parties, amongst others Labour’s Jeremy Corbyn, the Liberal Democrats’ Jo Swinson, and the Scottish National Party’s Westminster leader Ian Blackford, met in Mr. Corbyn’s offices in Parliament.
Their goal was to decide what steps to take, to prevent PM Johnson taking the UK out of the EU with ‘No Deal’.
It’s worth noting that Parliament’s opposition parties begin their talks in a position of strength. Since PM Johnson kicked out 21 of his own Conservative MPs, for rebelling against his Brexit strategy, Mr. Johnson runs a minority government.
This means that, when the opposition parties work together, they can take control of Parliament’s legislative agenda from the government.
The opposition parties have already done this once a few weeks ago, to pass the Benn Act. This law obliges the PM to request a second extension to Article 50, the UK’s Brexit negotiating deadline, if there’s no deal in place by October 19th, two days after an important EU summit.
The law makes it harder for Mr. Johnson to take the UK out of the EU without a deal by Halloween.
However, in the weeks since opposition MPs passed the Benn Act, Mr. Johnson has refused to say that he’ll comply with its terms, while simultaneously saying that he won’t break the law.
This has led the opposition parties to fear that the PM could seek a legal loophole, such as an archaic Westminster procedure, to avoid requesting another Brexit extension, while obeying the Rule of Law.
Given this, the opposition parties’ leaders met yesterday, to decide what next steps to take, to prevent Mr. Johnson achieving a ‘No Deal’ at the end of October.
To begin with, it’s worth noting that the opposition parties won’t seek a vote of ‘No Confidence’ against Mr. Johnson this week, even though it’s an ideal time, as Mr. Johnson is at the Conservative Party conference in Manchester.
This isn’t because opposition MPs have confidence in Mr. Johnson, but rather, if there’s a vote of ‘No Confidence’, they’d have to choose an alternative PM, and they can’t agree who this should be.
For example, the Lib Dems’ Mrs. Swinson has said that: "I have been crystal clear but I will do so again - Jeremy Corbyn is not going into Number 10 on the basis of Liberal Democrats' votes."
That said, the opposition parties did agree to work together, to ensure that there’s not a ‘No Deal’ Brexit.
For instance, the Lib Dems’ Mrs. Swinson argues that the Benn Act’s requiring Mr. Johnson to request a Brexit extension by October 19th is too close to the October 31st deadline. So the parties could amend the Benn Act, to bring this deadline forward, perhaps to October 5th.
Also, Labour’s Mr. Corbyn said following the meeting that he’s "absolutely clear we will do all we can within a Parliamentary scenario and within our own parties to prevent this country crashing out on the 31st October without a deal.”
This has cheered the financial markets, as it means the probability that there’ll be a ‘No Deal’ Brexit in the coming weeks remains limited, thus lifting sterling.
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Please bear in mind, this article is Pure FX’s opinion only and does not constitute advice. Moreover, the exchange rates referred to in this article are the interbank rates, which are the rates at which banks and financial institutions buy and sell currency to each other. Therefore these exchange rates cannot be accessed by individuals or SMEs, and are not the same rates that Pure FX can offer. To get a free exchange rate quote, call us on +44 (0) 1494 671800, or Contact Us.