After gaining more than 1 percent last week, pound to euro remained flat during yesterday’s UK Bank Holiday. The pound to euro exchange rate moved less than 0.15 percent as it maintained its break above 1.12, a 10-week high. Pound to US dollar remained equally subdued with less than a 0.2 percent change on the day but edging marginally higher to 1.3374. With the UK closed and a lack of economic data elsewhere there was little cause for fluctuation.
The pound’s gains were largely due to a US dollar sell-off that saw the pound benefit more than the euro and as such advance against both currencies. There was little of notable substance on the UK front other than Bank of England’s Governor Andrew Bailey’s Jackson Hole speech. Bailey confirmed that the bank still has plenty of firepower and was ready to act if needed. The Governor also said the bank did not plan on raising interest rates until there was clear evidence that the economy was achieving its 2 percent inflation target. In whole, the speech was relatively dovish and did not give any inclination as to the bank’s next move but this did not deter an increasing confidence in the UK currency.
Brexit talks have ground to a halt as both the UK and EU struggle with the EU’s demands on fishing and a level playing field. The EU is insisting EU states maintain the same fishing rights and that the UK sign up to its level playing field demand, which would see the UK continue to follow EU law. Both of these demands have been rejected by the UK and negotiations have now reached a point where UK chief Brexit negotiator David Frost has said unless the EU changes its position, he will recommend the UK leaves the European Union without a deal.
Following the last round of talks Michel Barnier said the EU would not discuss trade negotiations further until the UK agreed to the EU’s demands but the Express has since reported that Barnier has told EU leaders they may need to review the mandate if progress is to be made, suggesting there could be movement on the EU side.
Improving Risk Appetite Benefits the Pound but Uncertainty Lies Ahead
The week ahead sees little economic data for the UK although Eurozone inflation figures will be released this morning. If figures are low, this could see pound to euro climb. Otherwise, the week lacks any notable events, and with global confidence and risk appetite increasing, this could benefit the pound.
Brexit negotiations will not begin again until next week although the pound to euro exchange rate will remain sensitive to Brexit headlines. Next week the UK is expected to put forward its proposal on state aid although this will likely be dismissed by the EU. Nevertheless, the UK will have set out a clear proposal of its position.
The UK and EU have until year end to agree a trade deal however given the time needed for the European Parliament to ratify a potential trade deal, the EU has said a deal must be agreed by late October. To coin a Barnier phrase “the clock is ticking” and it certainly will be as there is now less than two months for the UK and EU to come to an agreement. Brussels has always stated that the EU see October as the make or break month as this is when EU leaders will meet and hopefully extract last minute concessions from the British. However, the UK is showing no signs of conceding on the EU’s key two demands in regards to fishing access or level playing field.
Whilst pound to euro may see short-term gains as market confidence improves and risk appetite returns, there is no doubt that the UK-EU trade outcome will have a significant impact on the pound to euro exchange rate over the coming months.
Despite the lack of progress, markets still remain optimistic of a UK-EU trade deal and a significant breakthrough in the negotiations could certainly send pound to euro and pound to US dollar exchange rates much higher. Although, if the UK and EU do not conclude a trade deal, pound to euro and pound to dollar exchange rates could fall sharply.
Therefore, for now the pound appears to have found some support but pound to euro and pound to US dollar exchange rates could see increased volatility in the weeks ahead with a sharp move higher on a UK-EU trade deal and sharp fall lower on no deal. Get in touch using the form below to discuss how these factors might impact your currency exchange and the tools available to help minimise the risk attached to the quickly changing currency markets.