Sterling finds itself in a very vulnerable position. It is not just Covid-19 the pound has to contend with, there is also the small matter of Brexit. Time is running out to get a deal over the line with Boris having only until the end of the month to call an extension on talks, which is something he has adamant he will not do, causing pound to euro exchange rate to move lower There are still some key points of contention such as fisheries and the Irish border and it looks like there is little chance of these being resolved by the end of June.
As talks intensify expect volatility on the market. It is very difficult to find justification as to why sterling will make significant gains in the coming weeks without clarity on Brexit. Pound to euro exchange rates has not been above 1.13 since 15th May. Commerz bank are predicting GBP/EUR could go as low as 1.02, which shows the markets lack of faith in the pound at this time.
The task that the UK is up against is a tough one. Let’s not forget Theresa May could not get a deal over the line for several years, many calling her stance on negotiations weak and questioning her ability to deliver. Could it now be the case that Boris finds himself in a similar position?
It seems Barnier is sticking to his guns and is not willing to make changes to his mandate.
There were rumours circulating on Tuesday last week that progress had been made in getting a resolution on fisheries. That combined with news from the Bank of England that we are a long way from negative interest rates saw a small spike for sterling with gains of around 0.1% against the euro. These rumours were quashed the following day, the Bank of England released another statement that they would take any monetary policy measures necessary in order to combat the economic problems created by Covid and it was then announce that both London and Brussels were at an impasse on fisheries. I think this further demonstrates how fragile sterling is at present.
Emergency Funding a Point of Contention For the EU
The Eurozone has its own trouble although at present. There has been inner squabbling in the bloc regarding emergency funding to combat Covid-19. Germany and the Netherlands are particularly unhappy taking on a collective debt through Covid bonds. It has been confirmed there will be €750bln available which although seems like a huge amount it is meagre when you look at the US who’s emergency package will be in the trillions.
According to Nicolae Stefanuta, MEP of the Environmental and Public Health committee, there are indicators that the EU’s €750bn COVID emergency fund needs to be bolstered with estimations that €5tn will realistically be needed to combat the pandemic.
The so called PIGS (Portugal, Italy, Greece and Spain) could be seen as a burden on the bloc due to their debt to GDP ratio. Many nations have questioned the benefits of remaining in the bloc, could it be the case that some members of the EU choose to follow the route taken by the UK and hold a referendum?
Maybe, that is why Brussels are making it so difficult to for Britain to get a decent deal over the line in attempt to ward off any other EU members from calling it quits. Further members leaving is a real threat to the euro although this is something that could happen later down the road. At present it is sterling that remains the more vulnerable when compared to the euro.
Euro sellers may wish to hang fire in the hope of further gains depending on their risk appetite. Currently pound to euro exchange rates sits in the low 1.11’s which is a favourable position considering GBP/EUR sat at 1.30 before the day of the referendum, but there is certainly the potential for further falls for the pound considering the circumstances.
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