Pound to Euro Exchange Rate Surges Higher on Brexit Optimism

GBP EUR Higher as German Inflation Hits 5%

The pound gained more than 1 percent against the euro and 0.6 percent again the US dollar during Friday’s trading as the UK and EU both confirmed they would work constructively towards a trade deal. Whilst there was no breakthrough the mood from both camps was positive.

It was always going to be difficult for the UK and EU to make progress when there are such fundamental differences between the two negotiating mandates. The EU is adamant that the UK must agree to a level playing field and EU fishing rights are incorporated within the free trade agreement. However, the UK is not willing to compromise its sovereignty and would rather trade on World Trade Organisation terms than sign up to the EU’s requests.

EU Chief Brexit Negotiator Michel Barnier’s frustration has been clear to see in previous negotiations as he has repeatedly blamed the British team for their lack of understanding and willingness to compromise. However, on Friday, Barnier’s tone was cautiously optimistic as he suggested the UK and EU could find common ground in the Autumn.

UK Chief Brexit Negotiator David Frost said, “We are close to reaching the limits of what we can achieve through the format rounds. If we are to make progress, it is clear we must intensify and accelerate our work.”

It is clear the negotiating teams cannot move forward on the current mandates and that intervention at a higher political level is needed. Attention will now focus on prime minister Johnson’s meeting in mid-June with EU leaders, including European Commission president Ursula von de Leyen, where it is hoped progress can be made.

However, it is unlikely that there will be a significant breakthrough at this meeting. At best, the UK and EU will look to get an understanding of where each may be willing to compromise. Whilst Brexit will be on the agenda, the EU’s focus will be on the €750 billion rescue fund and the 7-year budget.

How Long Does the UK and EU Have to Agree a Trade Deal?

The UK is currently due to end the transition period on 31 January next year although the EU has voiced its willingness to extend this by two years. However, the UK only has until the end of this month to request an extension and the UK government has repeatedly stated that they will not be asking for an extension. In fact, Boris Johnson went as far as to enshrine this in UK law.

Therefore, if the UK does not request an extension then the transition period will end on the 31 January 2021 and if a free trade agreement has not been reached by this time, the UK and EU will trade on World Trade Organisation rules.

Technically, the UK has until the end of the year to agree a trade deal with the EU but for the deal to be ratified by the European Parliament, a deal must be agreed by late October. The EU are pointing towards significant progress in the Autumn months’, but the UK would like to see progress much sooner. The problem is that the EU has bigger issues to focus on in the short-term in trying to unite nation states on a Covid-19 rescue package and the EU budget.

This is in addition to the recent German supreme court decision that put the EU’s biggest economy at odds with the European Central Bank. Germany’s highest court ruled that the ECB’s bond buying between 2015-2018 was illegal. This comes at a time when the ECB has announced €750 billion of emergency stimulus to deal with the economic damage of Covid-19 and a further €600 billion at last week’s central bank meeting.

It is unlikely we will see much progress in the summer months, which will make for a very busy Autumn period. It’s difficult to see either party walking away from the negotiations whilst there is still time on the clock, so the pound looks set to endure volatility against the euro and US dollar as the UK flirts with the prospect of no deal.

The EU will expect the UK to concede ground, but the EU must also be willing to relax their demands on fishing rights and a level playing field. By this time, it will almost certainly be the UK and EU chief leaders brokering a deal with the negotiating teams tying up the loose ends. If a free trade agreement can be reached here, EU leaders can support the deal at the European Council meeting before sending for approval at the European Parliament.

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