GBP/USD: Border frictions to prevent sterling’s climb – MUFG

GBP/USD is advancing this morning as some speculate a Brexit deal could be reached as soon as tonight. France agreed to open its border with Britain to trucks and EU passengers, conditioned on a rapid coronavirus test, but disruptions are set to continue, leaving the pound vulnerable, per MUFG Bank.   

Key quotes

“An agreement has been reached to test truck drivers at the UK border before being allowed to travel into France with the UK government bringing in the army to speed up the process of testing. Basically, considerable disruption and severe frictions in trade are set to continue despite this deal. The fact that the UK government is bringing the army in to speed up the process is itself indicative of the disruptions that are set to continue over the coming weeks as the backlog is slowly cleared.”

“With many issues now resolved according to reports from Brussels, the haggling over fishing appears to be what still needs to be agreed. If those reports are correct, then surely at this stage, a positive Brexit outcome is most likely.”

“The percentage of fish the EU will have to sacrifice and the transition period to that new number will now need to be sorted at the highest level. We assume any deal announced later will include some grace period on customs checks going live on the EU side. If that assumption is wrong, the gridlock we see now at the border with France will worsen and therefore GBP will get little bounce on the good news. Friction at the border is inevitable under a new deal but a grace period will at least help countries prepare under the certainty of the negotiated trade deal.” 

“We still would expect to see GBP/USD drop to the mid-1.2000’s on a no-deal, and quite quickly if no contingency plan was agreed between the EU and the UK.”