Talking Points:
- EU and UK are open to extended Brexit transition and implementation period.
- Officials from both parties expressed optimism and a desire to conclude Brexit.
- Irish border issues still remain the key sticking point in Brexit discussions.
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As the two-day EU Summit drew to a close Thursday, it would seem Brexit is still very much a work in progress. Although nothing was cemented either way – deal or no deal – officials from both parties expressed optimism and announced agreement over a few key issues. One such issue was the possibility of an extension for the transition period. But neither the British Pound nor the Euro seem to be inspired by the progress made the past few days.
European Council President Donald Tusk and UK Prime Minister Theresa May reiterated their willingness to accept an extension, which was later confirmed by comments from European Commission President Jean-Claude Juncker. Juncker said “extending the transition period will probably happen.”
At this time, neither side has commented on the exact length of the extension period. Based on media reports, it would appear likely that the transition window would be pushed back from December 2020 to December 2021 at a minimum.
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One other issue laid to rest during the summit was Gibraltar. The Prime Minister of Spain announced an agreement with the UK in the closing hours of the meeting but did not issue the exact details. Traders should keep expectations low for a reaction in FX markets when the details are announced, however, as Gibraltar is not considered a major sticking point at present time.
While clear progress was made on some minor fronts, some larger issues remain contentious. The border between Ireland and Northern Ireland is still hotly debated, and UK PM May expressed an unwillingness to accept the EU’s proposal on the matter. Similarly, German Chancellor Angela Merkel cited progress but claimed it insufficient to act as grounds for another Brexit meeting. She later said the EU-27 has a very high level of unity on Brexit, suggesting the two sides have reached a deadlock.
To this end, the November summit was canceled (which at the surface level is a negative, but can always be rescheduled if enough progress is made over the coming weeks).
EUR/USD Price Chart: 5-minute Timeframe (October 18, 2018 Intraday) (Chart 1)
Unsurprisingly, a summit deemed to produce not enough meaningful progress led to weak price reaction in both the British Pound or Euro (which has been dealing with its own Italian issues on the day). At the time of this article, both EUR/USD and GBP/USD were being pressured lower, while EUR/GBP edged higher.
GBP/USD Price Chart: 5-minute Timeframe (October 18, 2018 Intraday) (Chart 3)
EUR/GBP Price Chart: 5-minute Timeframe (October 18, 2018 Intraday) (Chart 3)
Read more: Brexit Effect on Pound and UK Stocks: Impact of Deal or No Deal
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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist and Peter Hanks
Contact and follow Christopher on Twitter at @CVecchioFX
Contact and follow Peter on Twitter at @PeterHanksFX
