Pound to euro and pound to dollar rallied almost 0.5 percent during yesterday’s trading as month-end flows caused a rebalancing in the market. Fund managers typically look to rebalance their books at month-end, and this often leads to excessive movements in currency pairs. Pound to euro surged above 1.10 and pound to dollar above 1.23 on the interbank exchange, and both pairs have consolidated above those levels this morning.
Sterling has been sold quite heavily over the past couple of weeks and yesterday saw some of that overselling corrected. That said, movement caused by month-end flows are often short-lived and the fundamental problems for GBPEUR and GBPUSD remain.
No-Deal Brexit Likely to Keep the Sterling Exchange Rates Low
Comments made by Boris Johnson over the weekend in a telephone conversation to Polish prime minister Mateusz Morawiecki has heaped more pressure on the pound as Johnson confirmed the UK would be prepared to accept a bare-bones Australia type trade deal, which is essentially the “no-deal” option. This would mean the UK and EU trading on World Trade Organisation terms, which are considerably less attractive than the current arrangement.
The prime minister’s rhetoric will ramp up the UK’s position that it is not willing to cave into the EU’s to key demands, which are preventing Brexit negotiations from progressing. The first issue is the EU has insisted that access to UK fishing waters for EU nations must continue in its current manner and form part of the Free Trade Agreement. However, the UK has resisted this demand, saying that the UK intends to take back sovereignty and that a fishing agreement must be agreed separately to an FTA. The EU recently suggested it may be willing to review its position on this point but would expect the UK comply wholly with its second demand.
The second issue is the EU’s demand for a “level playing field”. The EU expects UK companies to conform to EU standards so that they cannot undercut their EU competitors. However, this would mean UK businesses following EU law and being subject to European courts. Once again, this is at complete odds with Mr Johnson’s sovereign vision of the UK and as such, he will not agree to the EU’s demand here either.
Thus, the UK-EU trade talks have been gridlocked for some time and it’s difficult to see a middle-ground when both party’s red lines are so far apart. Nevertheless, negotiations have continued, and the UK and EU remain constructive in their tone. However, it is difficult to see significant progress with the current mandates. Therefore, there will likely need to be intervention from EU leaders before negotiations can move forward and this may not happen for some time.
Michel Barnier has pointed towards October as the month for a deal to be struck despite Boris’s calls to move things forward sooner. Boris is keen for the UK and EU to agree an FTA as soon as possible and avoid potentially unnecessary “no-deal” preparations but the EU won’t accommodate unless the UK bows to its demands.
The EU has more urgent issues to address in the short term that take priority over Brexit negotiations. Those being the EU’s 7-year budget which comes into place next year, only this time there’ll be no UK contribution, a big problem when the EU is one of only two significant net contributors, the other being Germany. The EU also needs to formulate a Covid-19 rescue package, a recent proposal by the European Commission is still causing great divide between the northern and southern states when it comes to funding. Lastly, and perhaps the biggest challenge the EU faces is the recent ruling by the German Supreme Court, which ruled the European Central Bank’s asset purchases between 2015-2018 illegal. Whilst ECB president Christine Lagarde has sidestepped questions on this matter and suggested all will be resolved, this has the capacity to be explosive for the euro and lead to an existential crisis.
Is the UK Economy Looking at an “L-shaped” Recovery?
The UK government has received criticism for its Covid-19 response, too late to shut down and mixed messages to the public and businesses being two of the main points. There is no doubt that the UK’s response could’ve been better, and the poor response has meant the UK growth outlook falls behind that of its European peers. Many now do not expect the UK to return to a pre Covid-19 position for 18 months, much slower than initially hoped, and if further waves cause more shutdowns like we’ve seen in Leicester this week, the economic recovery could be extended. Of course, this has had an impact on the pound and will continue to do so. The better the growth prospects for the UK, the stronger the pound will be.
Get in touch to discuss these factors in further detail, and how they could impact your upcoming currency exchange. I’ll be happy to contact you personally and discuss your requirements.