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All eyes on Boris Johnson's Brexit dinner summit in Brussels

Watch: UK Prime Minister Boris Johnson set for Brussels talks with EU counterpart

Investor attention remains focused on Brexit trade talks as Boris Johnson heads to Brussels to try and reinvigorate negotiations and finally reach a deal.

Downing Street confirmed on Tuesday evening that Johnson will travel to Brussels on Wednesday to have dinner with European Commission president Ursula von der Leyen.

“I’m hopeful that the Prime Minister will be able to lay out, over the course of dinner, where movement is required,” Cabinet minister Michael Gove told BBC Breakfast.

“The conversation between the prime minister and the president tonight, I hope, will create further political momentum, which will make sure that we do reach an agreement.”

The pound rose on Wednesday morning, boosted by hopes of a deal. Sterling was up 0.2% against the euro to €1.1057 (GBPEUR=X) and up 0.4% against the dollar to $1.3407 (GBPUSD=X).

READ MORE: Pound jumped briefly as UK agrees to drop controversial Brexit legislation

Sentiment was helped by signs that the two sides were inching closer to an agreement. In the last 24 hours, the UK agreed to withdraw controversial Brexit legislation that would have violated the withdrawal agreement. Instead, the UK and the EU reached an agreement on the issues Britain was seeking to address.

“Though this doesn’t resolve the main issues in the trade talks, this does remove a stumbling block from the talks that led to major unease on the EU side,” said Jim Reid, a senior strategist at Deutsche Bank.

File photo dated 15/09/20 of Prime Minister Boris Johnson returning from the Foreign and Commonwealth Office, following a Cabinet meeting. December 13th 2020 marks the first anniversary of Mr Johnson's General Election win.
Prime minister Boris Johnson returning from the Foreign and Commonwealth Office, following a Cabinet meeting earlier this year. Photo: PA

Trade talks have been stuck in a stalemate for months over three issues: fishing rights, so-called level playing field agreements, and enforcement of any final deal.

The breakdown of talks at this late stage has come as both UK and EU negotiators running up against the limits of their mandates. Johnson hopes that by speaking directly to von der Leyen he can circumvent this problem.

“It’s clear that some political impetus will be required for the talks to make any more progress,” a government source said.

“If we can make progress at a political level, it may allow Lord Frost and his team to resume negotiations over the coming days.”

READ MORE: Why has fishing become a linchpin issue for UK/EU talks?

UK minister have made it clear that they believe it is up to the EU to compromise.

“Unless we see some movement on the EU side, then it will be very difficult,” Gove told TimesRadio on Wednesday.

It is unclear whether this is a realistic hope. Last week France threatened to veto a deal if too many compromises were made, particularly on the issue of fisheries.

Watch: What happens in a no-deal Brexit?

“With markets slowly becoming inured to every single headline that is hitting the tape, it’s becoming even more difficult to gauge the mood coming out of Brussels,” said Micheal Hewson, chief market analyst at CMC Markets.

Hewson said he was hopeful that a deal could be reached but “a no deal is becoming much more likely than most would like to admit.”

“We must be realistic that an agreement may not be possible as we will not compromise on reclaiming UK sovereignty,” a government source told journalists last night.

READ MORE: Only 26% of UK businesses are fully prepared for Brexit

No-deal would likely have profound implications for sterling. Jordan Rochester, a foreign exchange strategist at Nomura, said the pound could fall to $1.20 if talks end in no deal — a slump of 10% from its current level.

“Political and market tensions are high,” Rochester wrote in an investment note. “We continue to expect a deal to be the final outcome, the timing is the tricky issue. If we are wrong and the UK opts for a no-deal Brexit, GBP would have a long way to fall and we would have to review our forecast for next year.”

“What is required in the next few hours is less pig headedness and more pragmatism on the part of all parties,” Hewson said. “There will be no winners from a no deal outcome, whatever either side might tell you. If anything a no deal would be a kind of mutually assured destruction.”

Watch: How to Brexit proof your finances