Sterling ends the week higher breaking over 1.11 for pound to euro and 1.2470 for pound to US dollar after an initial poor start to the week. Those looking to buy euros or dollars with pounds have seen a small improvement from one week ago creating a slightly better opportunity to buy these currencies.
The first round of weekly “intensive” Brexit negotiations throughout July rounds off today and any soundbites from political leaders from the UK and EU could have significant impact on the price of sterling.
Pound to Euro Forecast
Brexit remains the dominant driver for sterling exchange rates as the markets try to second guess the likelihood of an Australian style trade agreement, something which UK Prime Minister Boris Johnson mooted last weekend. However, such an arrangement is in reality code for a no deal Brexit, as terms would be based on World Trade Organisation (WTO) rules. Both the EU and Australia trade between each other mainly on WTO rules. In essence any deal like this would be a skeleton of a deal which the markets are increasingly nervous about. Put simply the pound has never been able to recover to levels seen pre referendum June 2016.
The pound did come under pressure at the start of the week following Boris Johnson’s acknowledgement. For the EU, German Chancellor Angela Merkel also said this week “I will keep pushing for a good solution, but the EU and Germany too must and should prepare for the case that an agreement is not reached.”
Only yesterday the UK’s chief negotiator David Frost confirmed that significant differences remain between the UK and EU despite three days of intensive face to face negotiations. In a sign of tough talks, the EU’s lead negotiator Michel Barnier said that there would be no deal unless the UK is prepared to accepts Brussels demands for a level playing field on trade and also access to British waters for fishing. He added that ‘after four days of discussion serious divergences remain’.
Negotiations will continue into next week and throughout July and August and additional volatility for the pound could be seen depending on the outcome of those tasks. As history has shown over the last four years whenever a deal is in sight the pound has generally moved higher and when the cliff edge no deal Brexit looks credible the pound vs Euro has dropped substantially.
Comments From Bank of England’s Chief Economist
The Bank of England’s chief economist and rate setter Andy Haldane recently said that he felt the UK was already experiencing a v-shaped recession as opposed the protracted u-shaped recession. The V-shape is what every economy wants to see as it means a speedy return to normality. His comments have been taken well by the markets although continuing Brexit uncertainty is keeping the pound under pressure. To support this, UK Purchasing Managers’ Index data is expected to show a rebound and improvement in business sentiment. As pub, bars, cafes and restaurants are expected to open the doors tomorrow 4th July the markets will be paying close attention to how quickly customers return to these establishments. There is of course a virus still at large and many people may wish to wait a longer period before frequenting these places. These next few weeks should give a much greater understanding as to how quickly the British economy will recover.
US Data Impacting GBPUSD
The latest US non-farm payrolls were released yesterday which highlighted that 4.8 million jobs were created. Whilst this is a strong number the dollar was unable to make gains against sterling as other underlying issues currently hamper the dollar. In California there has been a reversal of lockdown with many states having to back into lockdown after a number of Coronavirus hot spots saw cases climbing. This is all important as what is being seen in the US could also be seen here in the UK when lockdown measures are lifted dramatically tomorrow. With any surge in cases, there is likely to be a number of UK hot spots including Westminster and Brent in London. Any major changes the British government may have to make could see change in the price of sterling. There are still major concerns of a second wave of the pandemic which would be expected to hit in the Autumn. Further lifting of lockdown measures will also take place when schools in the UK are expected to re-open in September. That could also be another major juncture in this new normality and as we saw in March this year when Britain went into lockdown the pound crashed considerably against both the euro and the dollar.
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