Brexit talks border on failure

UK PM Theresa failed to reach an agreement with the EU regarding the first phase of the Brexit negotiations as a result of a last-minute disagreement over the Irish border. Northern Ireland’s Democratic Unionist Party, upon which PM Theresa May is reliant to maintain her majority in Parliament, opposes the closure of borders between Northern Ireland and the Republic of Ireland. However the DUP insists on not keeping the laws and regulations of the EU, under which the Republic is governed.

Align the Borders but not Regulation

At the heart of the issue is “regulatory alignment”. The DUP says it will not accept “regulatory alignment” between Northern Ireland and the Republic as a requirement to keep the border open. For Northern Ireland to align its regulation with the Republic means Northern Ireland companies will be locked in EU laws and potentially harm their competitiveness as they diverge from the rest of the UK.

Said differently, Northern Ireland is asking for a separate deal than the rest of the UK, which is driving the Scottish National Party to call for maintaining full single market membership.

The other source of a breakdown in talks is concerning the European Court of Justice. The EU insists that it’s laws continue to apply for it’s EU citizens in the UK after Brexit, while Brexiters say that would dilute British sovereignty.

Transition Phase

Only once the EU concludes that Britain has achieved “sufficient progress” in the first phase of Brexit negotiations have they agreed that talks can move to the subject of transition. Businesses have until March 2018 to push the two sides to finalize all details of the transition phase (the period following actual Brexit, where EU law persists in the UK but Britain loses its legal right in the EU). Therefore the the period until March should be time to plan issues of labour movement, customs and if UK-based foreign banks could still use London as a passport centre to the EU.

Transition talks are supposed to be finalised by March 2018, after which negotiations on trade and the future EU/UK relationship are set to kick off into autumn 2018. Will everything be complete by the Brexit date of 29 March 2019? It is far too early to tell.

The DUP’s political opportunism is understandable given Theresa May’s eroding bargaining power. But any breakdown in talks will be counterproductive, if not self-destructive to the powerful DUP. An agreement may not come before December 15^th, but it should likely emerge before mid Q1 2018.

GBP Implications

What does it mean for GBPUSDs road to $1.38? Technically, the path remains intact as long as $1.3270 is defended. And if $1.3330 holds by next week’s Fed decision, $1.37 may emerge before the New Year. A December Fed hike would only be a danger for cable if it is accompanied by the passing of US tax reform into law, a US government shutdown is averted and the border of negotiations remain blocked between the two Irelands.