Pound to euro rose to a 10-week high on Thursday touching 1.1278 before consolidating just above 1.12 to end the week. The pound to euro exchange rate had rallied following a boost in market confidence which saw a weakening US dollar with the pound as one of the main beneficiaries. At the same time pound to US dollar rose to 1.3473, a 9-month high before drifting back just below 1.33.
Bank of England officials have warned of sluggish growth and Governor Andrew Bailey confirmed that whilst there is no plan to use negative interest rates and preferred monetary stimulus would likely be in the way of further quantitative easing, a cut in interest rates was still an available option.
Rishi Sunak’s Furlough scheme, which has been vital in keeping the UK economy from suffering a greater crash will come to an end next month providing uncertainty around the jobs market. The UK unemployment level has remained low as many businesses have opted to place employees on the government’s furlough scheme, avoiding a sharp rise in the unemployment number but with many businesses struggling, it is likely the UK unemployment level could double as the Chancellor winds down the financial support.
Concern over UK economic growth, the jobs market, and a no deal Brexit is likely to limit a rise in the pound to euro exchange rate although markets appear to be paying little attention to the latter. Despite UK government officials now only seeing a 30-40 percent chance of a trade deal with the EU, the pound has remained supported.
The UK and EU have laid the lack of progress in Brexit negotiations firmly at the opposite number’s door. UK Chief Brexit negotiator David Frost has blamed Michel Barnier for his unwillingness to continue discussions unless the UK conceded on both the EU’s demands for continued fishing access and level playing field. Frost believing that other aspects of the agreement could be agreed whilst further talks take place on these contentious areas. However, Michel Barnier said the UK was holding EU fishermen to ransom and had shown no willingness to compromise despite the EU moving on their red lines.
Where next for the pound to euro exchange rate?
The UK and EU have less than 2 months to reach a Free Trade Agreement for the deal to be ratified by the European Parliament in time for the end of the transition period at the end of this year. However, despite whispers from diplomats close to the negotiating table saying the odds of no deal are increasing significantly, the pound to euro and pound to dollar exchange rates are not reflecting this risk.
There are two rounds of talks scheduled for this month with the first of those beginning on Monday. These will be crucial and whilst progress this week may be limited, both the UK and EU will be under considerable pressure to show progress in the negotiations later this month. The EU remains adamant that the UK must conform to its rules on fishing and a level playing field, but more specifically state aid, which appears to be the area the EU is most concerned by. Although, the UK insists that in order to advance as a sovereign nation and set its own laws it cannot commit to continuing to follow laws set in Brussels.
For a deal to be struck, both sides will need to compromise but for now, both the UK and EU remain committed to their promises. If progress is not made soon, the UK and EU will leave themselves trading on less favourable World Trade Organisation terms at a time when both economies have been devastated by the coronavirus crisis.
Angela Merkel recently stated that trade talks could play out until the end of the year and that could well be the case. Despite fundamental differences in how the UK and EU would like a future arrangement to look like, it is unlikely either side will pull out of the negotiations, which could mean a deal may not happen until the very end of this year.
This could have a significant impact on pound to euro and pound to US dollar exchange rates. Pound to euro could fall sharply and pound to US dollar could also return to much lower levels in the event of no deal. As the clock ticks the pressure will mount and the pound will become highly sensitive to Brexit headlines. However, a breakthrough in trade negotiations could send the pound to euro and pound to US dollar exchange rates much higher. Get in touch using the form below to discuss these factors in more detail, and how you can plan you Currency exchange in advance to limit your exposure to quickly changing currency markets.