Will Pound to Euro Fall further?

A Rollarcoaster Week for GBP EUR - Weekly Review June 18th 

Pound to euro ended the week nearly 1 percent lower and pound to dollar more than 1.5 percent lower as the Bank of England increased its quantitative easing programme by £100 billion on Thursday. Pound to euro is now trading at 1.1040 and pound to dollar at 1.2350.

The £100 billion increase in asset buying was in line with market expectations but investors had hoped for more and this was reflected in the pound’s downturn on Thursday and Friday. However, many suspect there will be further quantitative easing over the coming months as the BoE confirmed that whilst the UK economy had turned a corner, it would take a long time for job growth to catch up. The bank has been less clear on its plans than the US’s Federal Reserve and the European Central Bank which have both promised to do “whatever it takes” and the lack of “forward guidance” is also weighing on the pound.

Bank of England policy decisions are likely to play a key role in pound to euro and pound to dollar exchange rates over the coming months and if recent comments from BoE Governor Andrew Bailey and Chief Economist Andy Haldane are anything to go by, the pound could fall further.

Andrew Bailey and Andy Haldane have both confirmed that the BoE has not ruled out the possibility of zero or negative interest rates in addition to further quantitative easing, which has heaped further pressure on the pound. Whilst most economists do not expect the BoE to cut interest rates in the short-term, the fact the policy is being spoken about is bad news for the pound.

What Impact Will Brexit Trade Negotiations Have on the Value of the Pound?

Whilst BoE policy will no doubt influence pound to euro and pound to dollar rates, the main drive will be Brexit trade negotiations. As we’ve seen over the past 4 years, pound to euro and pound to dollar exchange rates rise when the UK looks likely to maintain close alignment with Europe and falls when the UK and EU move towards “no deal”.

The UK and EU have been locked in talks for months with little progress made. Chief Brexit Negotiators David Frost and Michel Barnier have their respective mandates and neither party has shown willingness to compromise. There are two key issues, the first being the EU has insisted on continued access for the EU to UK fishing waters and for this to form part of the trade deal, whereas the UK has always maintained that fishing access for EU states must be agreed outside of a Free Trade Agreement. The second issue is the EU is adamant that the UK agree to a “level playing field”. In practice, this would mean the UK following EU law and European Courts having the final say in disputes, something the UK said it will never agree to.

As such, the talks have remained gridlocked with both parties blaming the other for a lack of progress. That was until last week when we saw the first sign of compromise. On Monday, UK Prime Minister Boris Johnson held talks with EU Commission president Ursula von der Leyen, EU Council president Charles Michel and EU Parliament president David-Maria Sassoli.

A Brexit Concession at Last?

Shortly after Boris met EU leaders it was revealed that Michel Barnier would have permission to negotiate access for EU boats to UK fishing waters separately to the trade deal. Initially, markets welcomed the news and pound to euro pushed above 1.12 and pound to dollar pushed towards 1.27. However, these gains were short-lived, as whilst some progress had been made, the EU were still seeking a very similar fishing arrangement and it was made clear that whilst fishing would not form part of an official Free Trade Agreement, the two were intrinsically linked and failure to reach a satisfactory deal here would have repercussions.

The EU also used this opportunity to reemphasise the “level playing field” demand, saying that no EU state will sign an FTA unless this demand is met. This is a bigger problem than fishing rights as the EU are conscious that unless the UK agrees to this demand, the UK could divert away from EU rules, undercutting the EU and providing the UK with an unfair advantage. On the other hand, the UK has said it will not agree to EU regulations as that mean the UK not operating as a sovereign state.

Most agree the UK and EU will reach an FTA later this year, and this will likely happen in October, which will give the European Parliament time to ratify the deal and pound to euro and pound to dollar will likely both push higher at this time. However, in the meantime, the prospect of “no deal” remains a reality and until a deal is reached, the pound could trend lower.

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