Sterling to euro exchange rate remains fragile due to a number of determining factors. The pound is rarely the destination of choice during times of global economic uncertainty. This can be attributed to the huge imbalance between imports and exports. The pandemic has also caused huge damage to the UK economy, but of course other nations are suffering similar problems.
Sterling Hampered by High Risk of No-deal Brexit
It seems the key market mover is Brexit with talks being problematic from the outset. Many believed that Theresa May was incapable and lacked the backbone in negotiations, but could it be the case that Brussels are not willing to play ball?
Boris is now finding out the hard way. It is not in the interest of the EU to grant the UK with a favourable deal. If Britain were to get a decent deal it could encourage other members of the bloc to follow suit. The so called PIGS (Portugal, Italy, Greece and Spain) could be candidates who have been a loggerheads with the Brussels over several key issues. The engine room of the EU, Germany has also recently made their presence felt due to what the Germans consider to be unjustified Quantitative Easing (QE). QE is whereby funds are borrowed and pumped into a struggling economy in an attempt to boost growth. The Germans along with the Dutch are clearly not happy about taking other , less wealthy nations collective debt.
If Britain were to leave with a favourable agreement, this could potentially start a domino effect of Countries leaving which would be devastating to the EU. And so, could it be the case that Brussels are trying to make our exit as difficult as possible. Key issues still remain such as fisheries and the Irish border. It looks like Barnier has a mandate and he intends to stick to it. It is now clear a deal will not be reached by the end of July despite what Boris has said previously.
Johnson ruled out the opportunity to seek an extension to talks. A dangerous game, if we do not have a deal in place by October the UK will be leaving the EU with no deal which could hurt sterling substantially. To some extent a no deal scenario is factored into current levels of exchange as the market moves on rumour as well as fact, the day before the referendum GBP/EUR sat above 1.30, we are now in the 1.09s. Commerz Bank are predicting GBP/EUR could fall as ow as 1.02 should we end up in a no-deal situation.
Early Week Gains for Pound Sterling Fade
Sterling did see some gains earlier in the week with an increase in value against the majority of major currencies. This can be put down to an increase in risk sentiment following news of a potential vaccine coming out of Oxford. These gains were quickly lost however following news Johnson was willing to walk away form Brexit negotiations, again proving it’s influence and the fragility of the Pound.
The US dollar seems to be the destination of choice when there is global economic uncertainty, but due the spread of Covid-19 in the States its safe haven status is beginning to wane. This may not have too much benefit for the pound however considering the current state of affairs over here. The euro could benefit, so be aware of this if you are purchasing euros with sterling.
In order for the pound to make significant gains it is likely we will need some form of clarity surrounding Brexit which at present does not seem forthcoming.
It may be wise to try at what has been the peak of the market in recent weeks. If we look at GBP/EUR for example, we breached 1.11 this week very briefly, these were the best levels since 13th July. 1.12 has not been hit since the 9th June and is proving to be a resistance point so maybe aim for 1.11 as your target rate on interbank.
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