Pound to Euro – High Volatility Expected in Weeks Ahead

GBP EUR Exchange Rate: Week in Review August 28th

The pound to euro and pound to US dollar remains on a weaker footing with Brexit and COVID-19 continuing to act as the principle drivers. The pound to Euro rate nonetheless rallied higher to a high point of 1.1259 yesterday and 1.2363 for the pound to dollar. The movements follow intense media interest over the Bank holiday weekend surrounding the Prime Minister’s chief adviser Dominic Cummings and whether in the eyes of the law he broke lockdown rules when travelling from London to Durham. The Cummings story is relevant as he is perceived as instrumental in the ongoing Brexit process, Boris Johnson will make central decisions this week as to how to ease lockdown rules which will come into effect next week Monday 1st June. It has already been announced that non-essential shops will be able to re-open from 15th June subject to infection rates continuing to fall on current trend.

Brexit Negotiations Resume Next Week

Brexit decisions will also need to be made in the weeks ahead when important UK EU negotiations resume next week 1st June ahead of a crucial EU summit at the end of June. Whilst it has been reported that pressure has been building for the government to extend the transition period the stance from government is that it will not delay.

With the UK also in parallel trade talks with the US in a bid to use any skeleton deal as leverage against the EU, there could be political fireworks in the upcoming weeks. Those with pending currency requirements to either buy or sell euros would be wise to consider making contact and planning around all the latest developments. As the last four years has demonstrated the pound to euro rate can react very strongly to these crucial dates when decisions must be made. Any sign of a deal could see the pound rally higher creating a better opportunity for those buying other currencies with sterling Conversely any further lack of progress or risk of a World Trade Organisation Brexit currently being described by the government as an Australian style deal could see the pound lose ground rapidly.

Taking Brexit out of the equation, focus has recently been placed on the size of UK public debt which shot up in April as the government provided support for businesses and employees via its furlough scheme and other measures designed to keep the British economy afloat. The ratio of British public debt to national income is the highest level in 57 years. Economic activity is expected to have slumped by around 30% exacerbating the current situation. There are concerns that the Coronavirus could result in persistent and high levels of unemployment last seen in the 1980’s. Last week saw a surge in universal credit claims with a rise of 850,000 taking the total to 2.1 million despite strong efforts by the government to shore up businesses and keep employees on the books. The pound sterling forecast will very much depend on how that furlough scheme looks going forward and any changes to it could see a sizable shift in the price of sterling. The pound rallied higher towards the end of March after lockdown was introduced when the government introduced these kinds of initiatives.

BoE Meeting Next Week

The Bank of England next meet 18th June when high volatility may be seen for sterling exchange rates. Any changes from the central bank in monetary policy will be keenly picked up by the currency markets. There has been some speculation that the Bank of England may go down the path of negative interest rates and follow in the footsteps of the ECB.

Those with pending requirements to either buy or sell euros should pay attention to a speech today from European Central Bank President Christine Lagarde which could spark volatility for the pound to euro pair. Only last Friday the German Chancellor Angela Merkel agreed to have the EU recovery fund structured as grants rather than loans as a small handful of countries are requesting. Now both France and Germany have agreed to structure €500 billion as grants with Merkel stating that the economic impact of the virus could endanger the European Union’s social cohesion. The Financial Times reports that one senior adviser to Merkel said “the big concern is that the economic crisis will destroy the European single market and even threaten the future of the EU.” The so called Frugal Four – Netherlands, Sweden, Austria and Denmark are less keen to back anything of this scale and insist there should be loans unless there is reform change for those economies taking the medicine. Expect a politically heavy couple of weeks ahead as these economies try to find a way forward which may have far reaching consequences for the pound to euro pairing.

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