Backstop or should we say clearance centers or is that a backstop with a time-limit?

Brexit takes 2 steps forward, 3 steps back, one step forward as the EU summit looms large.

Brexit: Where are we this week

• The Irish backstop is shaping as the core battleground of a Brexit ‘agreement’. This hurdle, however, is far from clearable as both sides of the channel have differing views as to how to proceed and what the backstop/clearing centers look like.

The PM has suggested he has put forward a ‘constructive and far-reaching proposal’ around the Irish border issue. His plan is for ‘custom checks’ on the island of Ireland that would be ‘a way’ from the border and more conducive for leaving. These checks would be 5-10kms from the ‘north/south’ borders (i.e. between Northern Ireland and Ireland). He was at pains to say that the UK would not want an ‘east/west’ scenario (i.e. Northern Ireland to Great Britain) border scenario where Northern Ireland stays in the Customs Union as want a ‘One U.K.’ move.

The interesting thing about this comment is that the UK has been proposing an all-island Ireland zone for agrifoods, which effectively makes the Irish Sea the Customs border.

The EU is also looking at its ideas for the Irish backstop and is rumoured to be conceding ground of a time-limit backstop according to Bloomberg. Now this is mere rumour but the FX markets certainly took this as a sign ‘negotiations’ could begin. The GBP hit a new 3-month jumping 0.4% on this release.

Bloomberg sites some solid caveats the EU is looking for including the UK accepting the backstop set up long-term something the PM has refused to accept as he does not want the UK to be ‘trapped’ in the EU’s customs union.

Second to this, the Northern Ireland Assembly would need to accept this proposal which is unlikely and then Ireland’s Parliament would need to vote on it and accept this scenario, also unlikely.

So in short – a ‘time-limit’ backstop is the least likely outcome but something similar is being proposed and could get a deal done. Trading suggests anything resembling a concession or an ‘out’ of the Irish border crisis is a positive for Brexit and thus the GBP.

Hard Brexit chicken: ultimatums, counter-ultimatums and compromise are going to be the order of the day over the coming week.

The tick-for-tat phase Brexit is now in has gone to a new level as the PM and the EU look to be ‘facing off’ in a final 9-day showdown before the EU summit.

Wednesday will see Boris Johnson issue an ultimatum for ‘his’ Brexit. The point is simple – negotiate or ‘face being the reason for a hard (no-deal) Brexit’ (this is aimed at the EU).

His three ‘ideas’ are as follows:

1. ‘One U.K.’ will separate into a British customs regime this includes Northern Ireland and none of it will be in the EU’s customs union.
2. A four-year temporary arrangement around customs and regulatory administration on goods and services crossing the Irish border.
3. All policy will be subject to the “consent” of the regions affected

Sounds all very much like what has been on the table under the May negotiated deal and the current rumours about the Irish border. But what is clear is that this ‘final’ proposal looks like moving Brexit to a finality, something that has not been seen for most of the year. In fact, it looks like Brexit is moving into a position not seen in the past three and a half years – an actual deal being done. The major caveat here is all minor parties agree, and that looks improbable.

Therefore, the next 9 days are going to be huge for Brexit and huge for the GBP. Markets appear to be backing any news Brexit will happen outside of a hard Brexit suggesting there is upside potential for the GBP in particular.

Moves over the past 7 days.

GBP/USD

FTSE 100

EUR/GBP