Sterling has rocketed to month highs against both EUR and USD after two days of meetings between Boris Johnson and the leaders of Europe’s two largest economies, France and Germany.
The two key developments appear to be Macron hinting that the withdrawal agreement “can be amended while complying with the integrity of the single market…” and Merkel stating afterwards in the Hague that “we can work on finding a regime that keeps good Friday agreement and also ensures integrity of the single market”.
At first glance, there does not seem to be much new information in these headlines.
Sterling’s reaction underlines the extent to which Brexit is the sole driver of the currency – headlines that suggest no deal has become less likely, however marginal, have the potential to cause significant sterling rallies.
Given GBPUSD found support at around 1.20 on several occasions in august and we now look set for an extended period of negotiating, there is potential for a further rally.
Copyright: Bloomberg Finance LP.
However, extreme caution should be taken with any sterling optimism. Merkel and Macron’s comments amount to little more than an invitation for Boris to find a solution.
The new PM still faces the same constraints that led Theresa May to failure, and unless Boris is willing to compromise on some of his very well documented red lines, any solution the UK presents is likely to meet with rejection.