The pound to euro exchange rate fell more than 1 percent during Friday’s trading, closing the week at 1.1200 against the euro and 1.2112 against the US dollar. GBPEUR saw its worst week in nearly two months as the pound fell nearly 2.5 percent, and GBPUSD saw similar losses. Sterling was the worst performing of the G10 currencies as the pound was hit by fears of Covid 19 and Brexit risks.
On Friday, Brexit tensions sent the pound tumbling as the UK and EU remained in deadlock over trade negotiations. Failure of the UK and EU to reach a trade agreement would leave the two economies trading on basic World Trade Organisation rules and this raises concern over future economic growth in the UK.
Both the UK and EU’s Chief Brexit negotiators, David Frost and Michel Barnier were quick to criticise each other for the lack of progress. David Frost said that the EU must change its approach and drop its demand for a “level playing field” whilst Michel Barnier accused Britain of not understanding the consequences of Brexit and trying to cherry-pick access to the EU’s Single Market.
There are 6 weeks and one more round of negotiations remaining before the 30 June deadline for the UK to request an extension beyond the 31 January 2021. However, the UK is adamant that there will be no request to extend and that any deal must be hammered out this year. If not, the UK government is prepared to walk away.
Next week, the UK will publish legal negotiating texts, which are expected to show a trade deal and separate Norway-like fishing agreement, in an attempt to demonstrate the UK is not asking for anything that is not in normal trade agreements.
Despite the negative tone in both camps, David Frost and Michel Barnier both stated that they were not yet at the point of failure and that a deal was still possible, it was just subject to their opposite number showing some compromise.
Markets view the WTO option as negative for sterling as the UK would lose direct access to the EU’s Single Market and the country will be deemed less attractive to foreign investors. The UK’s negotiation team is very different to the one lead by Theresa May. David Frost has led a far more robust approach and this time round, Boris Johnson has the support in the House of Commons, following the Tories landslide election victory in December. However, if we’ve learnt anything from previous UK-EU negotiations, it is the familiar pattern that all appears to be lost only for a deal to emerge in the final minutes before deadline.
UK Covid-19 Testing Could Lend Sterling Some Support
Whilst the UK has received widespread criticism for its handling of Covid-19 and its lack of a clear roadmap to recovery, the UK is now testing a larger percentage of its population than any other country. This bodes well for the UK’s pathway to recovery as the track-and-trace strategy is seen by many as the big step to lift a country from lockdown. Public Health England confirmed a record 126,064 Covid-19 tests were carried out on Wednesday, and with capability to test only going to increase, this puts the UK in prime position to carry out an effective track-and-trace strategy.
Furthermore, Public Health England last week confirmed it had approved Swiss pharmaceutical company Roche’s antibody test and on Friday, the firm Abbott received approval to produce a Covid-19 antibody test, increasing the prospect that the UK could be on its way to successfully controlling and maintaining the virus.
The quicker the UK can return to a more normal way of living, the better the outlook for the UK economy. Whilst many economists are reducing their expectation of a “v-shaped” recovery, the UK will be desperate to avoid an “L-shaped” recovery.
Sterling could sink as deepest recession in 300 years hits UK economy
As the pound slumps, an array of market indicators suggests the worst is yet to come. Data suggests the UK could face its deepest recession in 300 years and money markets and technical charts point towards bets that the Bank of England will slash rates to below zero next year in order to stimulate growth. Last week, BoE Governor Andrew Baily said the BoE will do whatever it takes and pointed towards further quantitative easing whilst Deputy Governor hinted at the possibility of interest rates entering negative territory.
In addition, there are increasing signs that the market has not fully priced in the Brexit risk, leaving the pound with a tough run ahead. Barclays, Commerzbank and Nomura all see GBPEUR trading below 1.10 over the coming months.
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