The UK and EU will begin their 4th and final round of Brexit talks tomorrow before the UK must decide whether to request an extension to the current transition period, which is due to end on the 31st January 2021. Previous negotiations between the UK and EU have seen little progress with both the UK and EU refusing to compromise on their red lines. Whilst the UK has until November this year to agree a trade deal with the EU, the UK only has until the end of June to request an extension to the current transition period.
However, the UK government has stated time and time again that it has no intention of requesting an extension to the existing term. Thus, this week’s trade talks will be the most important to date and pound to euro and pound to dollar will be sensitive to Brexit media snippets.
Given the lack of progress to date and unwillingness of both parties to change their mandate, it is difficult to see how progress can be made this week. Last week, Irish Taoiseach Leo Varadkar ramped up the rhetoric as he said it might be time to begin preparation for a no-deal Brexit and the EU’s Stefaan De Rynck said the EU would not be reviewing the EU’s negotiating mandate.
UK prime minister Boris Johnson has also stated numerous times that if significant progress isn’t shown in June then the UK will prepare to leave the EU on World Trade Organisation rules. If the UK and EU stick to their mandates, then this coming week is unlikely to yield progress and pound to euro and pound to dollar are likely to trend lower.
The European Council will meet mid-June to discuss Brexit progress and Boris will meet European leaders shortly after. It is hoped that Boris can get EU leaders to alter the mandate if progress still hasn’t been made but there are no certainties. If the EU still refuses to budge and the UK refuses to extend the transition period, then the pound could fall fast as markets increase the no-deal outlook significantly. This will be the key event, in my view.
Sterling is G10 Worst Monthly Performer
Pound to euro closed the week at 1.1122 and pound to dollar at 1.2349, nearly 3 percent and 1 percent down respectively on the month. The pound has fallen across the board, recording similar losses against the Aussie dollar, Kiwi dollar, and Canadian dollar. The pound has been the worst performer of the G10 currencies over the past month and with Brexit progress likely to weigh heavily on sterling in June, sterling could see further falls.
Pound to euro has seen bigger losses than pound to dollar as the single currency gained support from the proposal for a €750 billion Covid-19 rescue fund. Better late than never, you might say? Whilst the proposal from the European Commission requires approval from nation states, this proposal is seen as workable. The lack of an effective Covid-19 rescue fund was causing the euro to lag and although this is not the bazooka many investors had hoped for, it’s a move in the right direction and will ease pressure on the euro.
By comparison, the US dollar has softened as investors risk appetite has increased although whilst many currencies have gained against the Greenback, pound to dollar has still seen losses.
Will the Bank of England Cut Interest Rates to Negative?
The chance of a V-shaped recovery for the UK dwindles by the day as Covid-19 lockdown measures ease slowly. Most now believe the UK has missed its chance of a V-shaped recovery and that it will likely be 2022 before the UK returns to a pre Covid-19 level.
Covid-19 has had devastating consequences on the UK economy already and further complications added from Brexit will only give the Bank of England greater cause for concern. UK interest rates are already at an historic low 0.1 percent but recent comments from BoE Governor Andrew Bailey and Chief Economist Andy Haldane suggest that the bank has not ruled out the possibility of negative interest rates.
Negative interest rates have been applied in other economies, but it is still questionable whether they have a positive influence. It is likely that the bank’s next response will be further quantitative easing rather than a cut in interest rates but if economic data slides further or the prospect of no-deal increases, then the bank may take emergency action. As we’ve’ seen previously, Central Banks do not need to wait for their scheduled meetings to launch more stimulus, instead they act instantly.
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