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26.02.2020, 12:40

The British Pound Has Some Support as the EU's Negotiating Mandate Is Ready

GBP/USD traded above 1.30 on Tuesday, which was the day when a press conference where chief EU's negotiator Michel Barnier was present, took place., Today's picture is different. The Sterling retreated to lower levels under 1.2930. Yet, the British currency has generally received a certain fundamental ground from the very fact that the 27 countries of the European Union were able to agree on a common position in post-Brexit trade talks, which are expected to resume next week.


"The EU is ready to open some ten negotiating tables at the same time," Mr Barnier said, quoted by Reuters. "These will be complex, demanding negotiations. The EU won't conclude talks at any price," he added. It means that the negotiation path will not be covered with roses as the EU's agreed mandate sets out some red lines for trade talks with the UK.


The British old-school Guardian newspaper made a brief analysis of the document in hot pursuit. The newspaper outlines at least two issues "where the gap between the two sides is widest - on the general issue of the need for a level playing field, and on the specific issue of fishing". As for the so-called "level playing field" which the EU wants to exchange for a free trade agreement, the key passage is paragraph 94. Here it is in full:


"Given the union and the United Kingdom's geographic proximity and economic interdependence, the envisaged partnership must ensure open and fair competition, encompassing robust commitments to ensure a level playing field. These commitments should be commensurate with the scope and depth of the overall envisaged partnership and the economic connectedness of the parties. These commitments should prevent distortions of trade and unfair competitive advantages so as to ensure a sustainable and long-lasting relationship between the parties. To that end, the envisaged agreement should uphold common high standards, and corresponding high standards over time with union standards as a reference point, in the areas of state aid, competition, state-owned enterprises, social and employment standards, environmental standards, climate change, relevant tax matters and other regulatory measures and practices in these areas. In so doing, the agreement should rely on appropriate and relevant union and international standards. It should include for each of those areas adequate mechanisms to ensure effective implementation domestically, enforcement and dispute settlement, including appropriate remedies. The union should also have the possibility to apply autonomous, including interim, measures to react quickly to disruptions of the equal conditions of competition in relevant areas, with union standards as a reference point."


The Guardian gives a fair amount of scepticism: "The EU mandate has been toughened up: Paragraph 94 is tougher than the equivalent passage in the original draft, paragraph 89. The original said the agreement should uphold "common high standards" in various areas but now it says the agreement should uphold "common high standards, and corresponding high standards over time with union standards as a reference point" in these areas. This is not the same as "dynamic alignment" - the toughest form of level playing field provision, involving a rule saying regulations would have to remain aligned (so that if, for example, the EU toughened its laws, the UK would have to follow suit). But it is a nudge in this direction."


The original also said that if the UK breaks these conditions, the EU should have the power to "apply autonomous interim measures" as a sanction. Now the text talks about the EU being able to "apply autonomous, including interim, measures" in response - implying that permanent, sanctions could be imposed too. The UK Prime Minister, Boris Johnson, in his written statement said from his side: "Any agreement must respect the sovereignty of both parties and the autonomy of our legal orders. It cannot therefore include any regulatory alignment... There is no need for a free trade agreement to involve accepting EU rules on competition policy, subsidies, social protection, the environment, or anything similar any more than the EU should be obliged to accept UK rules. The UK will maintain the highest standards in these areas - better, in many respects, than those of the EU - without the compulsion of a treaty."


His Downing Street No 10 office tweeted yesterday: "The UK's primary objective in the negotiations is to ensure that we restore our economic and political independence on 1 January 2021." The PM office added: "The EU has respected the autonomy of other major economies around the world such as Canada and Japan when signing trade deals with them. We just want the same", and "we agree the UK's trade with the EU is significant. The US's is on the same scale - yet that did not stop the EU being willing to offer the US zero tariffs without the kind of level playing field commitments or the legal oversight they have put in today's mandate."


It is difficult to say whether it is possible to find a common ground when the trust between the two sides seems to be under strain. However, when scrolling through the EU document, there is a sense of incompleteness and even potential fluidity of many of its points. And it may be due to the desire of the two parties, both the EU and Great Britain, just to make a kind of public show for the time being with a base plot consisting of the intransigence of their positions and of the willingness to defend the interests of businesses and residents in their jurisdictions. However, in fact they could gradually soften the sharp corners, which may not be so sharp by the end of the year. In the document, the EU ambassadors inserted a number of obviously impassable proposals, in order to abandon them later under the rising pressure from the British side. At the same time, the EU negotiator's goal could be simple: just to keep some other parts of the document almost untouched in the final version, because the British side could be inclined to treat those realistic conditions with a milder approach, as a part of a reasonable "compromise".


Everything that could be imagined is in the mandate now. The EU is filling it with numerous paragraphs that focus on with core values and rights, data protection, disciplines on technical barriers to trade, sanitary and phytosanitary measures that "should build on and go beyond the respective WTO agreements", labour and social protection, the environment and health policy, and even "a common fight against climate change" topics. But in reality, they could hope to leave only the dry residue that is badly needed in trade and customs conditions.


The same story is repeated when it comes to the fishing conditions. The EU will allegedly allow its fishermen to catch a larger proportion of the fish in British waters after Brexit, while Boris Johnson said already that British fishing grounds should be "first and foremost for British boats". The Prime Minister's spokesman reacted to this by saying: "The UK didn't vote twice to take back control of our fishing waters only to give that control up again. As a matter of fact, it doesn't matter what the EU puts in its mandate as we become an independent coastal state on December 31st, 2020." But this disagreement also seems to be more intended for the crowd. Perhaps, most of the market participants are keeping in mind the possibility that a final compromise agreement between the EU and the UK could be reached, and that maybe the main excuse why the investment community became more empathic to the British currency has to do with this possibility.


In addition to good economic statistics from the UK for the last two months, which includes jobs, GDP, inflation, retail sales and PMI, some positive moves in GBP/USD could also be a product of the US ten-year bonds yield dips below 1.35% that is close to all-time lows. This is all happening on coronavirus world market's correction, which increases bets on the Federal Reserve possible rate cuts in April and once again before the end of 2020. Not all this is, of course, a direct indication of the continuation of the upward movement in the British Pound, but it may create a more favourable environment for a possible movement of this kind at the right moment, if there will be any technical or fundamental additional push-ups. Meanwhile, the British currency may continue to get used to the already favourite price ranges of the last weeks both in GBP/USD and EUR/GBP.


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