The pound to euro exchange rate has lost almost 1.5 percent this week as it has fallen from 1.1172 to 1.1020. GBPEUR remains sensitive to investors ‘risk appetite and US stock market activity. When US stock falls, the pound to euro rate typically falls although when the US stock market rises, the pound to euro is not gaining equally and has remained somewhat subdued. The pound has arguably been one of the worst performing major currencies this past month as UK domestic issues weigh on the currency too.
UK economic data has only added more stress for the pound with Gross Domestic Product data for May recording a measly 1.8%. This was well below city forecasts of 5% percent and has cast more doubt over the prospect of a v-shaped recovery. Many economists feel the chance of a v-shaped recovery is one of hope than reality, but markets had been inspired by comments from Bank of England Chief Economist Andy Haldane two weeks ago who said the UK was still on track for a v-shaped recovery.
The UK unemployment level has remained low but with Rishi Sunak’s Furlough scheme still being utilised by millions, unemployment is expected to rise later this year as the scheme winds down and businesses cut costs. Some economists see UK unemployment levels surging to 15% by year end as businesses look to slash costs in order to stay afloat.
The gloomy outlook led Bank of England Governor Andrew Bailey to tell MPs that interest rates will remain depressed for at least two more years. The Bank’s base rate currently stands at 0.1% although it has been widely speculated that the bank could move to zero or negative rates later this year. Whilst no action has been confirmed the situation is under review and a move in this direction could send pound to euro lower.
Brexit Trade Talks Continue to Weigh on the Pound
Brexit trade talks will continue to drive the pound to euro exchange rate and the currency pair will likely remain sensitive to Brexit headlines over the coming months. The UK and EU have been negotiating for the past 3 weeks but it is not clear how much progress has been made.
Negotiations between the UK and EU concluded early last week, and the week before. Is this because negotiations have been constructive, and they’ve achieved as much as they could for the time being? Or have the UK and EU remained fixed to their redlines and brought talks close to early as they’ve been unable to progress due to lack of compromise? Whilst there have been headlines, markets are awaiting an official update from Chief Brexit negotiators, David Frost and Michel Barnier.
EU diplomats have reported that the UK and EU have started work on a “landing zone,” an area from which a Free Trade Agreement can be built, and that would involve compromise from both parties. However, has also been reported that the UK and EU still have significantly different views on fishing rights and the EU’s “level playing field” demand.
The EU is keen to maintain current access to UK fishing waters and has insisted access to UK waters for EU states must form part of a Free Trade Agreement, but the UK has refused this demand, saying an agreement on fishing must be separate to a trade deal.
The second issue and more complex matter is the one of a level playing field. The EU has insisted that the UK must adhere to a level playing field. In essence, it must not be possible for UK firms to undercut their EU rivals. This would mean UK businesses continuing to follow EU law and ultimately be subjective to the European Court of Justice, something Boris Johnson has said no sovereign country would sign up to.
Brexit has been a political football for past 4 years but now substance and progress is more vital than ever as the UK recently opted to not extend the transition period. This means the UK and EU will need a deal in place by October end if they’re to avoid trading on World Trade Organisation terms, which would be destructive for both economies, particularly when dealing with the economic collapse caused by COVID-19. GBPEUR will struggle to advance whilst Brexit concern remains but if the UK and EU can reach agreement by Autumn, this will open the gate for pound to euro to target 1.20 by year end.
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