Cabinet meets ahead of crucial EU summit

Theresa May addressed Parliament on Monday, confirming that talks in Brussels on Sunday had broken down over the UK’s refusal to include a ‘backstop’ in the withdrawal agreement to avoid a hard border on the island of Ireland.

But she insisted a deal was still "achievable" and that the UK and EU “were not far apart”.

She is now speaking to colleagues at a special Cabinet meeting to try and ensure the government is in agreement going into the high-profile summit.

However, divisions remain rife. According to reports, various pro-Brexit Cabinet members – including Dominic Raab, the Brexit Secretary, and Foreign Secretary Jeremy Hunt – met for pizza on Monday night to discuss how to block a ‘soft’ Brexit. The meal was organised by Andrea Leadsom, the leader of the Commons.

And in Europe, Donald Tusk, the president of the European Council, said Tuesday morning that the prospect of a no-deal Brexit was “more likely than ever before”.

Equity markets and currencies remain under pressure ahead of the latest round of talks.

Analysts at Monex Europe said: “May will gather her cabinet in an attempt to fudge an Irish border solution by including an opt-out clause the backstop, to quell prior fears over the indefinite nature of the UK’s access to the Customs Union after March.

“The time line remains tight though. The next 48 hours are crucial for Brexit negotiations, which will likely overshadow a week full of top-tier data for the pound.”

ONS published data on Tuesday showed UK pay had grown faster than expected. The pound was trading 0.52% higher at 1.1417 euros following the news.

But Monex’s Simon Harvey said: “August’s increase in wage growth to 2.7% may look good on paper, but any positive effects on consumer spending and sterling will likely be drowned out by noisy Brexit developments and increased savings intentions.

“Should Wednesday’s summit result in a deal, Brexit negotiations may finally start to show some of the progress the PM promised in yesterday’s statement to Parliament. Despite more headline data releases this week, such as CPI and retail sales, sterling’s immediate future hinges on Brexit headlines.”

Analysts at TD Securities said: “We think an early deal on the withdrawal agreement should be very good news for sterling – news that is not quite in the price. We believe that the pound could rally sharply against the dollar, euro and other major trading partners [if a deal is secured this week].”

But they added that if deal was delayed, turbulence would increase. “We would not be surprised to see political pressure in the UK pile up and delay the final sign off [and] could lead to a volatile few weeks in UK markets as speculation of a no-deal outcome rises.”