Sterling has gained some ground in recent weeks on reports that the UK and the EU are making ground in the Brexit talks. But, at just under 89p against the euro, it remains close to danger territory for Irish exporters.
And with the outlines of a deal to which everyone can sign up still elusive, sterling volatility can be expected in the weeks ahead.
The mood music in the markets is that a withdrawal deal remains more likely than not. But big risks remain. Bank of Ireland Global Markets warns of the risk of politically driven volatility and recommends businesses to hedge their exposures.
Despite talk of progress and possible compromises, the key issue of the Irish Border backstop remains to be agreed in the talks – and so far no way has been found to do this. The backstop is the last remaining major blockage to finalising the withdrawal agreement, the legal deal on the UK’s exit. The two sides also have to agree a political declaration on the nature of their future relationship.
It does appear that the EU side is working to "de-dramatise" the backstop – as Michel Barnier, the EU's lead negotiator has put it. Proposals and redrafts are being examined to try to take the political heat out of it in London and Belfast. But the fact remains that the EU solution still, according to sources, involves customs checks on goods moving between the North and the UK. And so far London has ruled this out.
No smooth past
Political signs of attempts to reach a deal will give sterling support. But it is difficult to see a smooth path to a withdrawal deal – and even then Theresa May must secure parliamentary support. And so significant sterling volatility is a possibility in the weeks ahead.
For Irish exporters, studies have showed that at rates above 90p to the euro, serious competitiveness issues emerge. The flip side is that if the risk of a no-deal Brexit in March of next year is seem to decrease or disappear, the UK currency is likely to bounce. The markets will watch the mood music at this week's informal summit of EU leaders in Strasbourg, but they would do well to realise that the real haggling is yet to come.
