Pound to Euro: COVID-19 and Brexit Keep GBP Under Pressure

Pound to Euro Starts the Week off Steady

Pound to euro and pound to US dollar ended the week a cent lower as investors concerns remain over the lack of progress in Brexit negotiations and the gloomy UK economic outlook caused by COVID-19. Pound to euro closed the week at 1.1144 and pound to US dollar at 1.2543.

It was confirmed on Friday that UK GDP contracted by a record 20.4 percent in April, worse than analysts’ expectations of an 18.4 percent contraction, in the first full month of COVID-19 lockdown. The crash in GDP was the worst on record since monthly records commenced 23 years ago and was more than triple the contraction we saw in March.

The UK service sector which accounts for 80 percent of annual GDP shrank by 20 percent and unsurprisingly, the biggest fall for any one industry was air travel, which crashed by a whopping 92.8 percent.

Boris Johnson said that whilst the UK economy would suffer a very serious economic impact but could bounce back. The prime minister confirmed that the government would outline plans to boost jobs and growth in the coming weeks.

The Bank of England has stated that second quarter GDP could fall by as much as 25 percent and unemployment levels could double. BoE Governor Andrew Baily said that the bank is willing to take further action to support the economy although noted there were now signs the UK economy was beginning to come back to life.

Investors remain concerned at the lack of clarity over the UK’s COVID-19 response as other countries have relaxed lockdown measures and returned to work much faster. In addition, the government’s U-turn on schools opening will make it difficult for the parents of children to return to work fully. The longer the lockdown continues, the more likely the pound to euro and pound to dollar rates are to suffer.

Gove confirms there’ll be no Brexit extension

Cabinet Minister Michael Gove has confirmed the UK government will not be seeking an extension to the Brexit transition period, due to end in January next year. The EU has made no secret of its willingness to extend the Brexit transition period and the UK has until the end of this month to request an extension, but an extension now seems almost certain not to happen.

This means the UK and EU will have until the end of the year to agree a Free Trade Agreement although the actual deadline will be late October as any FTA will need to be ratified by the European Parliament and this of course takes time.

EU diplomats have suggested the UK was keen to begin “tunnel talks’ next month but Michel Barnier has poured cold water on that idea, saying the two parties are too far apart and must show progress before tunnel talks can be considered. Tunnel talks are secret discussions, held away from the media and without regular updates to EU diplomats. Boris Johnson had said that the UK would be prepared to walk away from Brexit negotiations if there was no sign of progress in June however both the UK and EU have now voiced their willingness to continue talks until later this year, providing the pound to euro and pound to US dollar rates with some support.

Boris to meet EU leaders to brake Brexit deadlock

Prime minister Johnson will meet with European Commission president Ursula von der Leyen, European Council president Charles Michel and European Parliament president David Sassoli tomorrow when he’s expected to confirm the UK will not be extending the transition period, which now seems a formality.

Once confirmed, focus will quickly shift to how the UK and EU can break the current deadlock. However, a breakthrough at this stage is unlikely as both teams are unlikely to concede much on their strict red lines on fishing rights and the level playing field. Without fundamental change to the UK and EU negotiating mandates, it seems impossible for the UK and EU to find common ground as their opposite stances just don’t allow for it.

Whatever happens tomorrow, David Frost and Michel Barnier have pencilled in more talks for July and August as they’ll continue to work to try and unpick the deadlock. Pound to euro and pound to US dollar are likely to swing on Brexit news as we’ve seen before. Any inclination that the UK and EU are close to break through will send the pound higher against the euro and US dollar, but if the talks remain locked, expect the pound to trade lower against the euro and US dollar. October could be a particularly difficult month for the pound if an FTA is not agreed before then.

Get in touch to discuss these factors and how they’re likely to continue driving sterling exchange rates in the coming weeks. I’ll be happy to respond personally and discuss your requirements.