This will make it all right with Brexit

The pound has fallen almost 10% against the euro since mid-February. That says a lot about the concerns that the currency world is worrying about the failure of the Brexit talks. However, there are several reasons to remain a little optimistic.

British and European negotiators finally met this week to discuss a trade deal. That is months later than planned and the pressure to bridge the differences is greater than ever. On June 30, the deadline to extend the current transition period expired.

That comes as no surprise, as British Prime Minister Boris Johnson owed his election victory in December largely to a pledge to lead the country out of Europe by the end of 2020. For the time being, however, he does not seem to be in a hurry. For example, this week he announced that top negotiator David Frost will start as a security adviser in September. It is therefore no wonder that the British pound has been under increasing pressure in recent weeks. However, there are all kinds of reasons why Brexit could still turn out well.

A nice conversation
In recent months, both camps have spoken via teleconferencing. That's a great way to exchange information and make plans. But it is a lot less suitable for discussing sensitive subjects in a calm, subtle way.

This often works a lot better in the shade of the corridors or in a quiet pub, far away from cameras and journalists. Fortunately, the negotiators now have that chance again. Last Sunday, Frost and his team took the train to Brussels to sit behind the negotiating table. Many more rounds of talks are planned for the coming months.

Lots of money
The main reason why the odds of a No Deal Brexit are less than the decline of the pound suggests is simply money. Lots of money. The British government estimates that European fishermen catch more than €500 million worth of fish in its territorial waters every year.

On the other hand, the damage to London's business center is incalculable in a chaotic Brexit. If British banks, insurers and other financials are soon banned from doing business on the mainland, the treasury will miss out on €3,5 to €5,5 billion a year, scientist Davis Miles told the House of Commons earlier this year.

speed up
The extensive economic damage in the absence of an agreement and the hard deadline force negotiators not to hesitate. It is a great advantage that the parties sit together at the table again, instead of in front of a video screen.

All the ingredients are in place to make progress much faster than the rate that currency markets are now pricing in. And if the talks threaten to derail, Johnson and Angela Merkel will undoubtedly pull a rabbit out of their hat to avert a chaotic Brexit after all.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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