Moody music around Brexit sends sterling lower

Sterling took  a bit of a kicking as the mood music around this week’s Brexit talks took a decided turn for the worse. The EU came out with some pretty stern words for the British government over its internal markets bill. Less Ode to Joy and more Siegfried’s Death and Funeral March.

The EU Commission has come out fighting, saying the bill would, if adopted, represent a serious breach of the withdrawal agreement (perhaps) and of international law (more dubious, since the EU cannot hold any sway or sovereignty over UK domestic markets, laws or affairs after the exit from the EU).

Anyway, the British position (on paper at least) remains resolute. The UK government legal opinion is that it remains a sovereign matter of UK domestic law, which of course, it is, regardless of what the EU may think.

Brexit talks under threat as EU warns UK has ‘seriously damaged trust’

The EC called on Britain to ditch the problem elements of the bill by the end of the month and warned that the UK has ‘seriously damaged trust between the EU and the UK’, adding that ‘it is now up to the UK government to re-establish that trust’.

This is real brinkmanship. It is one of three things: it is either a cynical masterstroke in negotiating a deal. Two, it is a cynical move but a miscalculation on the British side, as it may fatally undermine the good faith basis discussions. Or three, it is simply a genuine good faith step based on the British desire to main the integrity of its own internal market, just as much as the EU insists on maintaining its own single market.

Either way the language and tone coming out of everything today would suggest a material increase in no deal risks – more no doubt to follow later this afternoon.

Pound sinks on heightened no-deal risks

GBPUSD sank to fresh six-week lows under 1.2860 with the road to 1.280 clear after breaching the 50-day line, which had offered the support yesterday. EURGBP surged to its strongest in 6 months above 0.92, boosted as a hawkish-sounding ECB put a firm under the EUR.

The euro was sent spiking against the dollar before easing back a touch after the ECB left rates unchanged and indicate it was all very pleased with itself and doesn’t think it needs to do a lot more. Christine Lagarde seemed far too relaxed about the appreciation in the euro, which helped send the currency back up to 1.19.

All in all she did beat a dovish drum and seems to have got her communication rather muddled, again. But after this spike, a bit of dollar bid came back as risk assets soured following the US open.