Talking Points

- Ireland’s Prime Minister, Leo Varadkar, has suggested an EU-UK customs union and a deep free-trade agreement.

- If adopted, his ideas might pave the way to a softer Brexit and therefore help support the British Pound.

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Leo Varadkar, the Taoiseach or Prime Minister of Ireland, has attempted to bridge the gap between the UK and the EU over Brexit, with several ideas to narrow the differences hindering a British exit from the bloc. Speaking Friday at Queen’s University, Belfast, he suggested the creation of an EU-UK customs union.

Varadkar also said that if the UK does not want to remain in the single market it could enter a “deep free-trade agreement with the EU” and re-join the European Free Trade Association. As for the argument over whether the European Court of Justice should oversee any new EU-UK deal, he said there could be a need for an “alternative mechanism” to the ECJ.

While there was no market reaction to the speech, it represented one of the first attempts to mediate between the UK and the EU, which have become increasingly entrenched in their positions and could ultimately help the British Pound, which has suffered from fears of a hard Brexit: in one day and out the next with no agreement in place.

Inevitably, the Taoiseach’s intervention will not be universally welcomed, particularly by Northern Ireland’s Democratic Unionist Party, which has agreed to vote with the UK’s ruling Conservative Party when necessary to give it a majority in the Westminster parliament. Earlier last week, the DUP’s Sir Jeffrey Donaldson warned Varadkar over “megaphone diplomacy” in relation to the Republic’s Brexit stance.

However, it will be welcomed by others at a time when the two sides seem as far apart as ever. An ORB poll published Monday concluded that 61% of British voters disapprove of UK Prime Minister Theresa May’s handling of the Brexit negotiations and the Fitch ratings agency said Brexit uncertainties will weigh heavily on investment in the UK this year and next.

The Sunday Telegraph newspaper reported that the UK is prepared to pay up to £36 billion to the EU to settle the Brexit divorce bill but May’s spokesman said Monday that he did not recognize the figure and that he would disagree strongly with comments suggesting the talks have started badly. They had been constructive so far, he added.

Near-term, none of this is likely to influence either the British Pound or other UK assets. However, longer-term, attempts to bring the two sides closer together could well have a positive impact.

Chart: GBPUSD Daily Timeframe (2017 to Date)

Brexit Briefing: Irish PM Varadkar Offers Way Forward

Chart by IG

Markets

Index / Exchange Rate

Change (Exchange Hours/GMT Session Rollover)

Market Close/Last

FTSE 100

+0.21%

7,527

DAX

-0.47%

12,240

GBP/USD

-0.10%

1.3030

EUR/USD

+0.17%

1.1791

EUR/GBP

+0.31%

0.9050

Upcoming UK/EU Event Risk

Events

Date, Time (GMT)

Forecast

Previous

German Trade Balance (Euro) (June)

Aug 8, 0600

23.0b

22.0b

German Current Account (Euro) (June)

Aug 8, 0600

24.5b

17.3b

German Exports s.a. (MoM) (June)

Aug 8, 0600

0.2%

1.5%

German Imports s.a. (MoM) (June)

Aug 8, 0600

0.2%

1.3%

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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