The pound to euro exchange rate rose to a 3-week high on Friday after its second week of successive gains. Pound to euro exchange rate hit 1.1185 before falling back slightly, almost 3 cents higher the 3-month low of 1.0901 just two weeks ago.
The pound had been sold aggressively on the back of Brexit uncertainty two weeks ago but a combination of Brexit optimism, Chancellor Rishi Sunak’s treasury stimulus and a more positive economic outlook have all boosted the value of the pound.
The initial rally was prompted by month end flows, whereby fund managers of investment portfolios realign their FX positions at the end of the month. The pound was then supported by comments from Bank of England Chief Economist Andy Haldane who noted the UK could be looking at a V-shaped rather than L-shaped recovery.
Coming into this week, pound to euro was boosted on media reports that Brexit trade negotiations had been more progressive than thought. Bloomberg published an article last week in which it said that EU diplomats had confirmed the UK and EU had sketched out a “landing zone” which was essentially a platform for a Free Trade Agreement to be agreed. Of course, there is a long way to go but the fact the UK and EU are now beginning to look at how a trade deal can be agreed, is encouraging.
It is also believed that the UK and EU are close to an agreement on fishing. The EU had insisted that EU access to UK fishing waters must be maintained in its current manner and must form part of the FTA. Although this was fiercely rejected by the UK, with the EU eventually retracting back from this demand. However, it is likely that the EU will still have significant access to UK fishing waters.
Like last week, trade talks ended earlier than planned, which is strange given both the UK and EU are often keen to emphasise that the clock is ticking, and that maximum advantage needs to be taken from the time that they have. However, it is not clear what we should make of this. Have the talks concluded early as negotiations have proved successful and a clear landing zone has been established? Or have negotiations concluded early because no common ground can be found as both the UK and EU are refusing to budge from their red lines? Either way, the pound to euro exchange rate has remain unfazed.
Will Pound to Euro Climb Hhigher?
Whilst the pound has rallied in recent weeks, pound to euro will remain sensitive to Brexit headlines and whilst diplomats have leaked information, UK and EU negotiators have remained tight lipped. Next week, David Frost and Michel Barnier will provide an update on trade negotiations and if the update fails to meet expectations, the pound will likely fall back.
The UK and EU only have until late October to agree a trade deal and with such little progress to date, time is fast running out. There has been a clear change in tone from both the UK and EU in recent weeks with both parties approaching the talks in a more constructive way. However, there is a long way to go and given the difference in how each party wants the FTA to look, the FTA could fall way short of the comprehensive agreement that some would like.
Despite the uncertainty, there are very few economists who see more than a 20 percent chance of “no-deal” but whilst the threat remains, pound to euro will struggle to reach those higher levels.
The UK economy is showing signs that a v-shaped recovery could be on the cards which is providing the pound with some support although the Eurozone also looks to be bouncing back strongly aiding the euro. Now, the UK recovery looks to be lagging that of other nations, which could partly explain why the pound has struggled. However, the UK took a big step on 4 July to easing lockdown measures and with increasing consumer and business activity, this is likely to spur the UK economy onto recovery at a faster rate.
Brexit trade discussions will be the key to the pound to euro exchange rate. If the UK and EU struggle to find common ground and reach an agreement then the currency pair could plummet but if a significant breakthrough is found, pound to euro could thrive and push towards 1.20 once again, a level not seen since February this year.
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