Why Brexit talks are heading for a crisis, and what this will mean for the market?

Given that British Prime Minister Theresa May has revealed a deadline of March 9th, 2019 for the conclusion of Brexit talks, you'd think that the negotiations would have progressed further even at this tentative stage.

Not only has progress been painfully slow, however, but negotiations between the UK and the EU could be about to reach crisis point. This is due to the thorny issue of the Irish border, which continues to divide opinion and could well ensure that the discussions between both parties grind to a total halt.

In this article, we'll consider whether or not this point of negotiation can be amicably resolved while appraising the impact that it's likely to have on the financial markets.

What's the issue with the Irish border?

Not only is the UK leaving the single market when it exits the EU, but it's also proposing to depart from the customs union. Given this, and with Ireland remaining a fully fledged European member state, the Union is insisting that some kind of physical border must exist between this nation and Northern Ireland.

So far, so reasonable, but the suggestion of a so-called 'hard' border (which separates EU member states from non-member nations) has been ruled out completely by the Conservative party. This is due primarily to the history of the island, with the Northern Ireland peace process and the Good Friday Agreement historically laid out detailed terms for the relationship between Northern Ireland and Eire. Installing checkpoints or border fences could well place these painstaking agreements at risk, and this is both politically unacceptable and potentially devastating.

This implies that some form of the frictionless or 'soft' border could be established, but even a compromised agreement may be deemed unacceptable to Ireland's government. The influence of the DUP over the Conservative party may also complicate the negotiation process, while the simple fact remains that the EU will insist on some kind of border being erected in order to separate the different customs regimes. These points making a resolution hard to envisage at this stage, at least without one party willing to compromise significantly on their position.

How will this impact on Brexit and the markets

In simple terms, this point alone makes it hard to imagine Theresa May's self-imposed Brexit deadline being met. Remember, talks between the UK and EU representatives will not progress until this issue has been resolved, while as one of the prominent EU member nations Ireland must also agree wholeheartedly to the terms of any agreement before the UK can exist with a progressive deal.

All of this has had a negative impact on the British pound (GBP), which has continued to trade in a narrow range ever since the EU referendum vote last summer and recently fell to within five cents of the Euro (EUR). More recently, it hovered around the €1.119 mark, having fallen from a modest high of €1.123 at the end of last week.

This has something to do with a recent surge in EUR sentiment, of course, with German SDP hinted at a possible coalition with Angela Merkel's CDU. This has the potential to break the political deadlock that has ensued in the country following the parliamentary elections, which has strangled the EUR and even contributed to a short-term increase in the fortunes of the GBP.

The Irish border issue is also contributing to the malaise of the GBP, however, with the currency likely to experience a further decline in the near-term. This is definitely something that forex trading enthusiasts should take note of, as hedging against the GBP and backing more robust currencies such as the EUR and the U.S. Dollar (USD) to thrive seems like the best investment strategy in the current climate.

■ Why Brexit talks are heading for a crisis, and what this will mean for the market?

TradingCenter Blog (2017)

fShare

Tweet