Sterling fell against the dollar and euro on Wednesday as the UK’s chief Brexit negotiator told MPs there was a “big gap” between the UK and EU in trade talks.
Brexit negotiator David Frost appeared before the House of Commons committee on the future relationship with the EU to discuss the most recent round of talks between the two sides.
Frost told MPs that the EU’s position was “not a mandate that is likely to produce an agreement that can be agreed with us”. He highlighted EU demands for access to UK fishing waters as a key sticking point in negotiations.
“If you’re asking do we think the EU needs to evolve its position to reach an agreement? Yes, we do,” Frost said.
“I think it’s fair to say that we have a fundamental disagreement at the moment on most aspects of the level playing field. There are one or two areas that are slightly less controversial and problematic but in most of the important areas, there’s a big gap.”
Frost added that it was “firm policy” for the UK not to extend negotiations beyond December, despite the onset of the COVID-19 pandemic.
“I think we have always put a lot of emphasis on economic and political freedom at the end of this year and on avoiding ongoing significant payments into the EU budget,” he told MPs.
Frost’s comments revived fears that the UK could end up leaving the transition deal with the EU at the of 2020 with no free trade agreement. Both sides must agree any extension by June under the terms of the deal agreed last year.
A lack of extension and disagreement between both sides at this stage would leave what many see as an impossibly short window to agree a meaningful trade deal.
If no deal is agreed, Britain would revert to trading on World Trade Organisation terms with the EU, a move widely seen as damaging.
“A relatively hard Brexit deal would probably not lower trade flows in the short-term further than they have already been cut by Covid, but it could stop them rebounding as far,” analysts at Bank of America wrote last week.
“Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic,” Neil Wilson, chief market analyst at Markets.com, said.
“Undoubtedly sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the COVID-19 pandemic and back into the cut-and-thrust of negotiations.”
The next round of talks between the EU and UK are set to begin in June, with UK prime minister Boris Johnson expected to attend. The third round of talks took place earlier this month and left both sides disappointed. EU negotiator Michel Barnier said he was “disappointed with the lack of ambition on the UK side.”