The pound to euro exchange rate faces added pressure this week as Brexit discussions continue in the third week of ‘intensive’ negotiations between the UK and EU, now being carried out face to face. Boris Johnson last week showed some optimism that he hoped a deal could be reached in July. At the same time however German Chancellor Angela Merkel has started preparing for a no deal Brexit after the British Prime Minister said he was ready to walk away from the negotiations. Michael Gove has said “At the end of this year we are leaving the single market and Customs Union regardless of the type of agreement we have with the EU. This will bring changes and significant opportunities for which we all need to prepare.” To put things into perspective this week will see the start of a campaign by the British government with ads on Brexit appearing on TV, radio and billboards. Britain is also expected to spend £705 million on border infrastructure. There have been some commentators that have hinted towards parity in rates for the pound to Euro. Robert Howards from Thomson Reuters said that “the pound could drop below 1.00 against the Euro for the first time if Britain exits the European Union on Australia terms as this would equate to a hard Brexit. Australia does not have a comprehensive trade agreement with the EU; much of EU-Australia trade follows default World Trade Organisation rules.”
Meanwhile other British trade negotiations continue in parallel with the EU talks. At the end of last week Turkey announced that it is very close to signing a trade agreement with the UK. The UK is a large trading partner to Turkey, second only to Germany, so any developments with other countries could be important in determining whether or not a UK EU deal will ultimately be reached. India is also reportedly trying to strike a trade deal with both the UK and EU and could be an interesting story to watch. Crucially the UK is also in talks with the US and any new developments in the weeks and months ahead could see a big shift in the direction of the Brexit negotiations and hence the pound. The US presidential election is also approaching and the political chemistry between the UK and US will be one to keep a close eye on and is something that could change the pound forecast considerably.
Pound Forecast – Pound Buoyant After Sunak Stimulus
Brexit aside the pound remains buoyant after the substantial stimulus from the Chancellor of the Exchequer last Wednesday which included the headline grabbing change to stamp duty. The tier to which stamp duty is applied has now been increased to £500,000 with immediate effect and it is hoped will help support an uncertain property market following Covid-19. The government seeks to prop up construction and the housing market which are normally the first two sectors to fall in a recession in an attempt to support a v-shaped recovery.
Whilst lockdown measures have been relaxed considerably in recent weeks there are growing concerns over the risk of a second wave of the pandemic which is not being helped by the sudden spikes in COVID-19 cases which have been reported in different parts of the globe.
Melbourne has gone into another lockdown for six weeks to try and contain the virus whilst Hong Kong has had to reintroduce new measures. Hong Kong had seen relatively few cases but is now having to shut schools following the spike. Further corona hot spots could hamper the overall global economic recovery, something investors are closely monitoring. The US dollar as a safe haven currency is heavily impacted by these developments as is the Australian dollar which is a commodity currency. Rates for GBP USD and GBP AUD could see significant market movement on any improved outlook on COVID-19.
Those with pending currency requirements should remember that these times are unprecedented. Not only has the pound never been able to recover in four years following the Brexit referendum but the onset of COVID-19 exacerbates the situation as the economic hit is so substantial. Whilst the furlough scheme has kept about 1/3 of the British workforce employed (about nine million people), we are now approaching crunch time and how many of those jobs remain will be crucial for the economic recovery and also the strength of the pound.
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