Brexit can be kicked down the road in a classic EU fudge

• Brexit negotiations remain stuck, four months ahead of Brexit Day.
• Postponing the decision is becoming a viable option.
• The Pound could rise in case a hard Brexit is averted.

The European Union and the United Kingdom have made significant progress on a wide range of issues in the Brexit negotiations. However, the question of keeping borders open in Ireland and the Irish sea remain a sore sticking point, and no creative solution has been found just yet.

All sides agree that there should be no border between the Republic of Ireland and Northern Ireland. An old-new border would endanger the Good Friday agreement and peace in the Emerald Isle. A border with customs checks is necessary if the UK leaves the EU customs union.

One solution is to keep Northern Ireland aligned with the EU on customs while the rest of the UK leaves the bloc. However, separating NI from the rest of the UK is a solution that is unacceptable to many Brits and also to the Northern Irish DUP party that props up May’s Conservative government.

Various creative solutions using modern technology did not gain traction in the talks.

Transition forever

Looking at past crises in Europe, the modus operandi has been “kicking the can down the road”: finding a temporary solution without resolving the most problematic issues. Greece has received three bailouts that only extended its debt repayments. Banks have been kept afloat despite opinions that they are insolvent. Euro-zone reforms have never materialized.

Brexit could also be can-kicked down the road.

The UK leaves the EU on March 29th, 2019, in around four months. However, both sides agreed on a transition period that will last 21 months, through 2020. The precedent of deciding on the transition could open the door to further extensions.

The UK could officially leave the EU on Brexit Day but continue paying into the EU budget, enjoying access to the single market and having to abide by the rulings of the ECJ for a more extended period. Borders would also remain open, keeping the hot topic of migration high on the agenda.

The idea has been floated around the October EU Summit and was not rejected by the main actors. The UK government played it down by saying “it is just an idea” but did not rule it out. Hard Brexiteers see any delay as a plot to keep the UK in the EU.

Nevertheless, as the noise from the ticking clock becomes louder, the urge to hit the snooze button will grow as well. A long transition period may turn into the best possible solution or even the only reasonable choice.

GBP/USD and can-kicking

Markets hate uncertainty and prolonging the transition period and leaving the hot topics open is not good news. However, the short-term relief of no hard Brexit is good news. Sterling suffered from the failure of the EU Summit and could advance if the idea reaches center-stage once again.

A full relief rally will have to wait for a full solution, but recovery is certainly on the cards.

More: 3 takeaways from the UK-German agreement can-kicking exercise for GBP/USD traders