Pound to Euro Forecast Less Bright as Recession Approaches

GBP EUR Recovers from Early Losses on EU Trade

The pound to euro and pound to US dollar rate has fallen against over the last week and has failed to recoup those losses. Although sterling exchange rates have traded in a narrow range it is striking to see there has been no bounce back for the pound having tested the higher levels of 1.15 for GBP EUR over these last few weeks. UK Chancellor Rishi Sunak has indicated that up to 3 million people may be unemployed by the end of the Coronavirus. At the moment there are 2 million people claiming unemployment benefit taking the total unemployment level to 5.8%. Whilst is was announced that the UK furlough scheme would be extended until October the Chancellor cannot guarantee saving everybody’s job.

He added that the UK is “likely to face a severe recession the likes of which we have not seen” as a result of COVID-19. The concern for the UK is that the bounce back will not be so quick. The V shaped recession which has been hoped hoped for is now starting to look like a more prolonged U-shaped recession which is more problematic for the British economy. The V shape recession is sharp but it ends quickly but the U-shaped recession businesses and individuals to not jump straight back into action and start spending. If Covid-19 continues to hamper economic activity, let’s face it people do fear getting the disease, then the economy could remain in this limbo period for an extended period. UK Gross Domestic product data released last week highlighted the damage caused to the British economy after a contraction of 2% in the first quarter of 2020 which is the sharpest contraction since the financial crisis of 2008. Deloitte has forecast that GDP could contract to 11.77% for the year. GBP to EUR is now trading below 1.12 for the pair and GBP USD sits at 1.2230.

Brexit a Main Driver for Pound to Euro Exchange Rates Once More

Brexit has also once again become a major driver for the pound as the markets try to second guess where the ongoing negotiations will take Britain.

The pound to eurforecast is less optimistic at present after the EU’s chief negotiator Michel Barnier said on Friday that the talks risked hitting “stalemate”.

The Brexit talks will resume 1st June ahead of a crucial EU summit to be held at the end of June.

Those with pending currency requirements would be wise to consider their options ahead of any major new developments. Once again, the prospect of a no deal Brexit looms over the UK and the pound and as we history has shown whenever the prospect looks like a credible outcome the pound has generally weakened.

One forecast form Commerzbank hints that the pound to Euro exchange rate could fall to its pre 2008 financial crisis low of 1.02 in the next three weeks.

The Sunday Times reports that UK Prime Minister Boris Johnson still sees a deal in sight although it could be a bumpy ride to get to that point. The Financial Times reported that the British government are preparing to increase capacity at ports along the East side of the UK in readiness for any disruption at the port of Calais. Calais is notorious for industrial action and it would appear the government is expecting disruption from French fishermen. The political hot potato of British and EU fisheries is still very much cooking and it may only be a matter of time before the pressure becomes too much. Expect big political fireworks on this particular matter which could result in market volatility if it impacts on the wider negotiation.

Whilst pressure has been building for Britain to extend the transition period beyond the end of 2020 the stance coming out of government is no extension. These next few weeks will be crucial in determining the outlook for UK and EU relations.

If the UK walks away from the talks to avoid being under the jurisdiction of the European courts then the UK will look to move to trade on World Trade Organisation rules in what the government currently describes an Australian style trade arrangement. How well that goes down with the EU remains to be seen so expect a fraught negotiation to continue.

Retail sales data is released on Friday and should give some insight as to how the British high street has been hit in real terms. Expectation is for a fall of -16% for April and any deviation from this could see considerable volatility for the price of sterling.

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