Pound to euro surged 2 cents from Monday’s low to end the week just shy of 1.11 but the pound’s advances were once again halted by Brexit. The currency pair started the week at a fresh 3 month low after Boris Johnson confirmed in a telephone conversation to Polish prime minister Mateusz Morawiecki that the UK would accept a bare-bones Australia type deal. This immediately sent pound to euro lower as Australia does not have a Free Trade Agreement with the EU. Australia and the EU trade on World Trade Organisation terms, which are considerably less attractive than the current UK-EU arrangement. Essentially, this is a “no deal” Brexit.
Pound to euro plummeted to 1.09 but a combination of month end flows, a £5 billion infrastructure spend by the UK government, and comments from Bank of England Chief Economist Andy Haldane saying he feels the UK is rebounding faster than anticipated, eased the pressure on the UK currency, sending pound to euro back towards 1.11.
However, the pound’s rally was ended when Brexit trade negotiations were unexpectedly cancelled on Thursday lunchtime. UK-EU trade talks should have concluded on Friday but were ended 1 ½ days early. It is not clear what brought the negotiations to such an abrupt end, but EU Chief Negotiator Michel Barnier was quoted as saying “after 4 days of discussions, serious divergences remain”.
Michel Barnier cited 3 areas of disagreement. Firstly, EU access to UK fishing waters. Secondly, the EU’s insistence of a “level playing field” to ensure UK businesses do not undercut their EU competitors. And thirdly, the position of the European Court of Justice to resolve disputes.
The UK and EU have had their differences on these issues for some time but with the clock running down, there isn’t time to be throwing away valuable negotiating time. As such, markets are becoming nervous at the possibility of “no deal” by judgement or accident, particularly now the prime minister has a clear mandate for Brexit from the British people and the UK government does not fear leaving the EU on World Trade Organisations rules.
Will There be a Brexit Trade Deal?
Whilst the pound to euro exchange rate has stalled as Brexit uncertainty causes market jitters, officials in Brussels have said that the UK and EU are beginning to draft an agreement in which both parties will need to compromise in order to reach a deal by October. The initial scope is broad but a general “landing zone” that would provide the foundation for a later Free Trade Agreement is being discussed.
Whilst there is clearly frustration for both the UK and EU at the lack of progress, both parties have struck a more constructive and optimistic tone in recent weeks. Since the UK confirmed it would not be extending the current transition period beyond year end, the UK and EU now know that if a deal is to be agreed, it must be done in a matter of months. There will be no more extension and no more time beyond what is now available to get a deal. If they continue to play politics and do not make enough progress, the UK and EU could find themselves trading on WTO terms by next year.
The EU has backed down from its demand that fishing rights must form part of the Free Trade Agreement and it is understood that negotiators are looking at how the European Court of Justice could maintain jurisdiction but allow the UK to maintain enough distance. Also, Michel Barnier has suggested the EU is willing to review its demand for a level playing field, arguably the EU’s most important of the 3 issues, but expect the UK to show compromise too.
Progress in trade talks has been painfully slow but with less than 4 months for the UK and EU to thrash out a trade deal, pound to euro will be in for a bumpy ride. Whilst most expect the UK and EU to agree a trade deal by October, pound to euro is likely to remain under pressure whilst the possibility of no deal remains. Pound to euro will be sensitive to Brexit headlines, rallying on optimism of a deal and falling when the UK looks to be distancing itself from Europe. Ultimately, it is within no one’s interest to not reach an agreement and with COVID-19 causing unprecedented damage to both economies, the last thing either need is further self-imposed damage.
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