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MUFG analysts note that the GBP continues to trade in a more volatile fashion as we move closer to the Article 50 deadline.

Key Quotes

“Cable rallied yesterday from around 1.2080 up to 1.2180 on the back of some comments from German Chancellor Merkel which initially encouraged speculation that the EU could be more willing to compromise over the Irish border backstop to prevent a “No Deal” Brexit. However, on closer inspection it still appears that the EU’s position is largely unchanged in so far as they want to keep the Irish border backstop in the Withdrawal Agreement as insurance and remain committed to finding viable alternative arrangements so that the backstop may not ever need to be used.”

“More specifically Chancellor Merkel stated yesterday that “the moment we have a practical arrangement with which we can uphold the Good Friday Agreement and still define the limits of the domestic market, we won’t need the backstop. That means, of course we will think about practical solutions. If you want to find these solutions in the future, you can also find them in the short-term.”

“The EU is ready for that. But for that we don’t need to re-open the exit agreement. That is a question of the future relationship”. Unfortunately, it is unlikely to satisfy Brexiteers in the UK government who want the backstop completely removed. It leaves the EU and UK on course for a No Deal Brexit at the end of October unless there is a last minute compromise or a change in UK government. As a result, we continue to believe that the risks for the pound are skewed to the downside even as the market has moved along way in recent months to price in “No Deal” Brexit risk.”