Pound to euro and pound to dollar fell more than 2 percent during last week’s trading as sterling experienced its worst week in 2 months. GBPEUR dipped to 1.1182 and GBPUSD sank to 1.2104 as investors risk appetite tapered.
A lack of progress in Brexit talks was the main instigator in the pound’s fall as another round of trade talks emerged with no prospect of a deal in sight. The EU’s Chief Negotiator Michel Barnier was quick to criticise the UK for its lack of compromise and understanding of the situation whilst the UK’s Chief Negotiator David Frost said the EU was still not treating the UK as a sovereign nation and was making demands beyond any normal trade agreement.
The UK has until 30 June to request an extension to the current transition period, which currently sees the UK leave the European Union on 31 January 2021. If the UK does not request an extension by this date then an extension will not be possible, heaping further pressure on the UK and EU to agree a trade deal before the end of the year. The alternative would be that the UK-EU default to World Trade Organisation terms in February next year.
At present, neither the UK or EU are showing any sign of budging from their positions and as such, the UK government is now increasing preparations to walk away from trade negotiations and exit the EU without a deal in place.
The EU is demanding that the UK agrees to a “level playing field” and that the same access to UK’s fishing waters continues for its member states. However, the UK is saying that this demand would bind the UK to EU law or standards in a way that’s unprecedented in a normal free trade agreement.
There will be one more round of negotiations in early June and if there is no breakthrough, both sides will decide if it is worthwhile carrying on. Michael Gove is now chairing regular meetings of the government’s no-deal committee and civil servants have been moved back from working on the COVID-19 crisis.
Brexit has taken a back seat in recent months as national governments battle the COVID-19 crisis, but the lack of progress is quickly returning Brexit to the forefront of investor’s minds. If there is no change at June’s meeting, then the possibility of the UK leaving the EU without a deal will send the pound lower. Last time, the UK looked to be leaving the EU without a deal, which was in August, the pound-to-euro rate tumbled to 1.0647 and the pound-to-dollar rate to 1.2022.
Could UK Interest Rates Drop Below Zero?
Bank of England’s (BoE) Chief Economist Andy Haldane’s suggestion that the BoE will do what it takes to support the UK economy has led investors to believe that the bank will increase their bond buying scheme at June’s meeting. Quantitative Easing currently stands at more than £600 billion and with interest rates already at 0.1 percent, and the bank painting a gloomy economic outlook for the UK economy, another round of quantitative easing appears inevitable. In addition, and to some surprise, Haldane did not rule out negative interest rates.
Whilst there is no immediate suggestion that the bank would cut interest rates further, the bank has always been reluctant to look at this measure, but with the UK economy perhaps facing its worst time in 300 years, everything is on the table.
Lack of Clear COVID-19 Exit Plan Weighs on the Pound
Despite the UK easing restrictions on the lockdown measures, the UK’s pathway to exit the current COVID-19 crisis is still not seen as clear. It was hoped that whilst there would be a significant drop in GDP, the UK could recover quickly, however as time passes and many businesses remain closed or functioning and part capacity, the chance of a “v-shaped” recovery is slowly fading away. UK economic data has been woeful and with the worst yet to come, investors are not confident the UK can get back on its feet as quickly as initially thought.
UK Chancellor, Rishi Sunak has increased the government’s furlough scheme until October in the hope to reduce redundancies but with business and public confidence dwindling by the day, a sharp bounce back is unlikely. The longer the lockdown continues, the more businesses will go bust and the higher the unemployment level will rise. Even when conditions do ease further, businesses will proceed with caution and it is unlikely the government will get the economic engine going as quickly as it would like. Like Brexit, concern over a COVID-19 recovery has weighed on the pound and could cause further selling pressure over the coming weeks.
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