Brexit: No major breakthrough expected before 1 July

Key takeaways

• As expected, the fourth and final negotiation round concluded on Friday without any major breakthrough.
• The next key event to watch out for is the high level summit between PM Boris Johnson, European Commission President Ursula von der Leyen and European Council President Charles Michel at or around 19 June.
• We do not expect the UK to ask for an extension of the transition period (deadline 1 July) and do not expect any sub-deals on fishery and financial services either.
• Our base case remains the two sides can reach a simple free trade agreement on goods trading before 31 December 2020 (65% probability), but the risk of a no deal Brexit has risen to 35% (20% previously).
• We expect EUR/GBP to move higher near-term, as investors start to reprice the risk premium. Risk to this outlook is global risk sentiment, which continues to improve. For more see page 2.

No major breakthrough at any of the four negotiation rounds

It has been a while since we sent out our latest Brexit monitor. The main reason is that not much has happened on Brexit in recent months, especially because both the EU and the UK have been occupied handling COVID-19. The current status right now is that the fourth and final negotiation round concluded on Friday 5 June and, as expected, without any major breakthrough.

The next key event to watch out for is the high level summit between the UK Prime Minister Boris Johnson, European Commission President Ursula von der Leyen and European Council President Charles Michel. We do not have a date yet, but some reports says it may be at or around 19 June, see POLITICO. Remember the deadlock in the withdrawal negotiation did not break until PM Boris Johnson met with other European leaders. The difference from then to now is that PM Boris Johnson now enjoys an 80 seat majority in the House of Commons, i.e. he can basically decide whatever he wants.

The possibility of extending the transition period expires on 1 July and despite good economic reasons for giving more time to negotiate the permanent relationship (in particular now that both the UK and the EU are in recession), we do not expect the UK to ask for an extension (10% probability of an extension). EU lawyers have said that it is not possible to extend the transition period after this date, see Institute for Government. According to the political declaration, the two sides also aim to strike sub-deals on fishery and financial services before 1 July, which, however, should be thought of as a "soft" nonbinding deadline. That said, we do not expect a deal on financial services and fishery before 1 July either (20% probability of a deal on fishery and financial services).

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