Better Than Expected UK Data Supports Pound to Euro Exchange Rate

Pound to Euro Exchange Rate Lower with Brexit Talks on ‘Knife Edge’

The pound to euro exchange rate has been under pressure of late with poor economic data and the prospect of a slower return to growth than other economies being a couple of reasons for that weakness. However, economic data released on Friday showed activity in the UK’s dominant services sector and retail sales has risen faster than expected.

Retail Sales data released by the Office of National Statistics showed an increase in June of 13.9 percent against a market expectation of 8 percent. This release was particularly welcomed as it whilst the number is lower than June last year, the release shows a significant increase in consumer spending, which will be instrumental if the UK economy is to bounce back with a v-shaped recovery.

In addition to upbeat Retail Sales numbers, IHS Markit Purchasing Managers Index Services data rose to 56.6 in July, which follows a reading of 47.1 for the previous month. A recording above 50 represents expansion of a sector and a reading below represents a contraction. Thus, the latest data provided a further boost for the UK economy in a sector that accounts for 80 percent of UK GDP.
Pound to euro climber slightly although ended the week at 1.0986, fractionally up on the day, and pound to dollar rose to 1.2797 by close of play, 0.5 percent higher on the day and nearly 2 percent higher on the week.

Despite the positive numbers, many economists remain cautious as the data whilst encouraging does not give a full insight into the performance of the UK economy. The UK saw its sharpest quarterly contraction ever in Q2 as the UK went into lockdown at the height of the Covid-19 crisis, but many now expect the UK to retain to growth in Q3.

However, there are still approximately 6 million workers benefitting from Chancellor Rishi Sunak’s furlough scheme that are yet to return to work and it is likely that as the Chancellor reduces the support and UK businesses are left to pay their employees, we will see further redundancies. Some think unemployment could reach 15 percent later this year, nearly 4 times the current level.

Will the UK and EU Agree a Brexit Trade Deal?

As the UK and EU emerged from their latest round of trade talks on Thursday, hopes of a breakthrough were quickly dashed as both UK and EU Chief Negotiators David Frost and Michel Barnier confirmed little progress had been made on fishing, the EU’s level playing field demand and the role of the European Court of Justice.

Boris Johnson had previously suggested that the UK may be prepared to walk away from negotiations if significant progress hadn’t been made by the end of this month but negotiations will continue despite both sides blaming each other for the lack of progress and lack of compromise. Further talks are scheduled for August and some progress may be made here but it is unlikely significant progress will happen until October, if it’s to happen at all.

Whilst there was no breakthrough, the EU conceded slightly on the position of the ECJ and indicated flexibility on this point. The EU has previously indicated flexibility on fishing as well although it is unlikely the EU will compromise much at this stage.

Pound to euro and pound to dollar exchange rates will likely continue to be sensitive to Brexit headlines with the currency pairs rising on reports that align the UK and EU more closely and falling when the UK and EU move closer to World Trade Organisation terms.

At this stage the political rhetoric from both sides is that they will not budge from their red lines although as we’ve seen time and time again, agreements with the EU are rarely reached until the final hour. And it is unlikely a Free Trade Agreement with the UK will be any different.

Therefore, expect the next few months to be bumpy as the clock ticks down and the prospect of no deal increases, unsettling the markets and sending the pound lower. Although, as we enter the Autumn months, pressure will grow on political leaders to break the deadlock and with compromise on both parts, a deal likely struck. Given the red lines on both sides, it is difficult to see how a comprehensive trade deal could be reached at this stage but a basic trade deal for goods with a few add-ons could be in place by late October, in time for the European Parliament to ratify.