The pound to euro exchange rate fell further on Friday despite trading in a narrow range following the sharp fall in GBP value seen on Thursday. Those looking to buy euros have recently been presented with a small window of opportunity after a sustained period of little market movement for the GBP/EUR pair.
Fears of a No-Deal Brexit Causes Pound Sterling to Lose Value
The Brexit trade negotiations resume this week into the eighth round of formal talks following little to no progress in recent weeks. It has been well reported that the EU has been insistent that Britain must align itself closely with EU rules and regulations in order to avoid what it views as unfair competition, something many UK negotiators describe as unrealistic. UK Prime Minister Boris Johnson said on Friday that “Britain would prosper mightily one way or another” and suggested that he felt comfortable with Britain trading with the EU in a similar way that Australia does, largely on World Trade Organisation rules.
The last four years have shown that the prospect of a no-deal Brexit is seen as negative for sterling exchange rates. At this time though following the lockdowns in economies seen across the world there is a strong argument for the British government to step in and support certain sectors. One such industry could be steel which is currently being reviewed by the government, but another could be the tech sector. It is reported that the government does not want ‘to pick winners’ but would like to support a range of different companies.
With most of the world in recession the government is likely to be considering such options to include state aid which of course would be headed for a collision with the EU in these Brexit negotiations. With the clock ticking down to the October EU summit which is when the EU states that a deal must be reached to allow time for ratification, there isn’t much time left to come to an agreement. Those with pending requirements should keep a close eye on all the latest developments in these final stages as any breakthroughs or suggestions a deal cannot be reached could result in major volatility for the price of sterling.
There is a wider issue here, that of Scottish independence. There are concerns that a messy no deal Brexit could result in a push for a second referendum in Scotland. As the Brexit negotiations intensify in these coming weeks there may be more mention of a potential breakup of the Union.
The Sunday Times has reported that the Chancellor Rishi Sunak will soon be announcing Britain’s first free port. The advantage of such a port is that UK tariffs and taxes will not apply. More are expected to be announced in the weeks and months ahead and will be sued as way of stimulating economic activity to try and bounce the economy out of recession. Of course, this is a hugely important topic in the Brexit trade talks.
Taking the hugely important topic of Brexit out of the conversation and there are still so many uncertainties for the UK economy as there are for others. UK mortgage approvals saw a strong jump higher in July taking levels close to those seen before lockdown. Mortgage approvals jumped from 39,900 in June to 66,3000 in July which is no doubt helping support the British housing market.
Bank of England States that Unemployment May Rise Sharply, Hampering UK Economic Recovery
The Bank of England has suggested that the strong bounce in the economic recovery is unlikely to last and has expressed fears that unemployment may rise sharply in the months ahead. Its central forecast is that unemployment will peak at around 7.5% before the end of the year. As the government furlough scheme and tax deferral schemes come to an end the reality is that jobs are going to go. Michael Saunders who sits on the Bank of England’s Monetary Policy Committee (MPC) has indicated that further monetary easing will likely be required. His comments are in line with other members who sit on the MPC including Gertjan Vlieghe.
Tomorrow morning sees the release of unofficial retail sales data for the month the of August from the British Retail Consortium. There has a been a strong bounce in the retails sector especially where online shopping has thrived since lockdown measures were eased in the UK. A strong number which could indicate the recovery is sustainable could be seen as positive the pound sterling forecast.
There could be an interesting end to the week with Friday’s Gross Domestic Product numbers for the UK as the markets try and determine whether the worst us over. If you have an upcoming currency transfer and would like to learn more on the factors influecning GBP or EUR exchange rates, feel free to contact myself, James Lovick, using the form below.