The GBPEUR exchange rate has continued to hold on to its recent gains despite growing tensions in the ongoing Brexit negotiations. Rates for GBPEUR hit a high of 1.1278 yesterday before falling 0.5% but the pound remains elevated and has presented some better opportunities for buying Euros. The UK has experienced better Purchasing Managers Index data for the manufacturing and services sectors which has improved the economic outlook. The government initiative of discounted meals in restaurants during the first half of the week has proved to be a major success story as well in the challenging times.
The Sunday Times reported last weekend that following the heavy economic hit to the UK economy the British government may seek to prop up and subsidise some of those ailing companies and industries which have been badly hit by Coronavirus. The topic of state aid has become a key sticking point in the ongoing trade negotiations. It appears that the damage caused by Coronavirus is exacerbating the problem. Both the UK and EU remain at loggerheads on the issues of the level playing field, state aid and the hot potato which is fisheries.
The EU seeks to know what policies Britain will introduce once the transition period ends and insisting that Britain must follow EU rules that prevent British companies being subsidised by the government even after the transition period ends. David Frost, the UK’s chief negotiator, has reportedly told his counterpart Michel Barnier that unless these demands are dropped then he will recommend that Britain leaves without a trade deal. Negotiations will move into the eighth round of intensive talks next week following some informal meetings this week. Any new developments could see significant volatility for the pound to Euro exchange rate. October is set to be the last opportunity to strike a deal to allow it to be translated and ratified. With the clock ticking down then high volatility could follow at this crucial juncture.
Coronavirus Impact on UK and EU Economies
In the EU, the outlook for the Spanish economy has deteriorated. The fourth largest economy has seen a sharp rise in new COVID-19 infections recorded in August with new restrictions being imposed. Spain has now recorded more than 8,000 new cases each day for the last two consecutive days. This news is likely to result in additional measures to try and halt the spread of the virus.
Spain is more widely impacted due to a higher level of tourism than in other EU countries. France has also seen household disposable income fall by its biggest amount in seventy years in the second quarter. The outlook isn’t all bad though after France and Germany, the two biggest EU economies, both recorded higher consumer sentiment.
The UK is currently recording about 1,000 new cases each day but it important to recognise that when COVID-19 first hit the UK and EU it was about three weeks ahead in the Eurozone. The test now is whether there is a sizeable increase in new cases in the UK as Brits return from holidays on the continent. The pound took a major crash just before Britain went into lockdown in March when there is global turbulence in the financial markets. Whilst the government has signalled there will not be another lockdown the outlook and the pound to Euro forecast still remains unclear as to the extent of a second in the pandemic.
The markets are also closely monitoring policy developments at the Bank of England. Bank of England Governor Andrew Bailey recently rejected claims that the central bank lacks additional firepower to help the economy recover from recession when taking into consideration that interest rates are at record lows of just 0.1%.
The Monetary Policy Committee (MPC) has stated that although negative interest rates are unlikely to be used any time soon, they are still “in the toolbox”. The MPC is keeping a close eye on the economic hit following Coronavirus and importantly the level of unemployment that follows. The Bank of England forecast that UK unemployment will hit a peak of around 7.5% before year end. Any deviation from this forecast however could carry significant volatility for the GBPEUR. It is recognised that companies are making structural changes with redundancies already taking place with some big high street names announcing job losses. The employment data in the weeks ahead will be closely monitored as the extent of the overall damage is still not clear. There is a lag between what is happening on the ground in real time and when the data is eventually released.
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