Having traded near sessions highs most of the morning session, sterling suddenly tumbled (even if Gilts refused to move) following a Bloomberg report that the UK is said to see Brexit breakdown if the EU refuses to compromise. In immediate kneejerk reaction, GBPUSD plunged 50 pips, to session lows on fears that Theresa May's visit to Brussels will be meaningless and just another opportunity for Juncker to get drunk.
As Bloomberg adds, Brexit negotiations are heading for a "catastrophic breakdown" unless the European Union signals this week that it will allow talks to move on to trade, according to a person familiar with the U.K. government’s position.
While the headline is likely just another trial balloon meant to send a message to Brussles, Bloomberg notes that without a clear sign that negotiations will progress to trade and transition arrangements by December at this week’s summit of European leaders, "the entire Brexit process will be in danger of collapse - and senior British ministers are losing faith in the EU’s willingness to strike a deal", a Bloomberg source said.
Speaking on condition of anonymity, the person said Prime Minister Theresa May took a political risk by promising to pay into the EU budget and settle the divorce bill in a speech in Florence, Italy, last month and now needs something in return before she can make further concessions. As reported earlier, the assessment comes as the prime minister heads to Brussels for dinner with EU chiefs ahead of a critical summit starting Thursday, and is calling EU leaders individually in last-minute diplomatic efforts. May will spend 90 minutes talking with European Commission President Jean-Claude Juncker and the bloc’s chief negotiator Michel Barnier on Monday in an attempt to break the deadlock in the negotiations.
Some more details from Bloomberg:
Germany and France made clear on Friday they want to toughen the tone of a declaration that’s being prepared for the summit, according to an official familiar with the discussions. The latest draft already offered the U.K. little beyond encouraging words and a call for Barnier to start preparatory discussions on trade talks -- but only within the European side.
Talks have stalled because Britain won’t detail how much it’s ready to pay as it leaves the bloc until the EU starts discussing the future trading agreement and the transition that Britain wants to smooth the split. Europe says it won’t do that until May’s government takes steps toward an agreement on the bill. With or without a deal, the U.K. will leave in March 2019.
German Chancellor Angela Merkel and French President Emmanuel Macron are the two key obstacles to allowing talks to move on to trade, according to the first official. Germany has a vested interest in delaying progress in the Brexit talks because Frankfurt is trying to tempt companies away from London, the person said.
Meanwhile, Euroskeptics in May’s Conservative Party want her to “call time” on the negotiations and walk away without a deal. She needs the EU now to create the atmosphere and the space for her to make any further concessions, because her political position at home is so precarious, the person said.
Since so far no compromises have been offered by any Eurocrats, tonight's unexpected Theresa May dinner and drinks with Juncker could make or break the Brexit process, not to mention cost May her job.