One of our core themes for 2018 will be the ascension of the EU from fragile union to a unified political and economic force.
We can see the start of this transformation in the current EU/UK Brexit negotiations. British Prime Minister Theresa May and European Commission President Jean-Claude Juncker failed to make progress after hours of discussion with differences over the Irish border proving the recent barrier. Externally members expressed confidence that a deal would be arranged in time to allow EU policymakers to focus on the future trade relationship. However, internally the mood is more apprehensive. According to internal sources, talks will resume later this week. Despite all the progress made in the Brexit negotiations there is feeling that the EU is taking a difficult stance while the UK is bending (highlighted by the divorced bill concessions).
We see a deal unlikely at 14-15 December EU Council meeting. Bullish EUR exposure was paired backs and GBP long increased on speculations of a breakthrough in negotiations. Short-term traders were caught on the wrong side, as negative news flow hit the wires and EURGBP rallied back to 0.8848. Given our long-term theme of a strong EU, we suspect the risk rewards favours long EUR/GBP fading Brexit positive news. The Irish border issue will find an ordinary solution but there will be another blocker right around the corned. And negotiators have not even got to the difficult part (trade). We have increased our view for a “hard” Brexit. EUR/GBP is holding around the 200d MA with a clear close above 0.8850 triggering an bullish extension to 0.8879 (55d MA).
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