Pound to euro continued its decline falling 1 percent during yesterday’s trading to 1.1027. The currency pair has now lost more than 2 percent since last week’s 10-week high of 1.1279. Pound to US dollar saw an even steeper decline losing close to 1.5 percent and is now nearly 3 percent lower than the recent 9-month high of 1.3471. The pound’s sell-off continued as market fears over a no-deal Brexit increase and global stock markets fell.
Stock markets were beginning to look very inflated so a reasonable fall in giant US tech firm’s stock is perhaps overdue. The pound’s correlation with the rise and fall of the stock market is part of the reason for the pound’s decline although Brexit uncertainty is really what’s making investors anxious.
One of the biggest concerns is that Boris Johnson and the UK government are looking to pass a bill that would essentially override the UK-EU withdrawal agreement. However, in the House of Commons yesterday, Northern Ireland Secretary Brandon Lewis said that the government’s proposed legislation would break international law. The UK is insistent that the current Withdrawal Agreement is contradictory in places and needs this bill for clarification, but the EU has said if the UK breaks international law, there will be no chance of a trade deal.
The UK and EU resumed negotiations yesterday, but it will be incredibly difficult for lead Brexit negotiators David Frost and Michel Barnier to break the deadlock with their current mandates. In fact, it wouldn’t be a surprise if the talks concluded early as the focus looks likely to be on UK and EU political leaders and their statements.
The UK Government has ramped up the rhetoric and appears to be taking a firm line although it is not clear why the tone has ramped up so quickly. Is the UK government looking to breakdown the negotiations and exit with a clean break following the Australian style trade agreement? Or is the government looking to increase heat on EU Chief Negotiator Michel Barnier in the hope he will look to compromise on the two key areas of resistance? Or is there another reason for the government’s bullish approach?
What Next for Pound to Euro Exchange Rate?
The EU has been less than happy with the UK’s approach and the European Commission has threatened to walk away from the talks if the UK breaks international law. There has been no comment from Michel Barnier who is expected to provide an update on Thursday although yesterday’s events will no doubt be a significant talking point for the two Chief negotiators this week.
The UK has insisted that a significant breakthrough must be made soon and is adamant the EU must move on both the fishing and state aid issues to get that breakthrough. However, the UK and EU have more than a month to reach an agreement and whilst we are clearly entering the final straight, the EU has a history of negotiating down to the very last minute. As such, this could leave the pound to euro and pound to US dollar exchange rates open to high volatility over the coming weeks as the currency pairs remain sensitive to Brexit headlines.
It seems progress will be reliant on UK and EU leaders reaching an agreement on fishing and state aid, issues that both sides are insisting their stance is a prerequisite of any trade deal. The EU is insisting that EU states must maintain access to UK fishing waters but the UK is saying that fishing access must be agreed separately to a Free Trade Agreement, as the EU has done with Norway. Secondly, and arguably the more contentious of the two issues is the topic of state aid. The EU wants the UK to sign up to its rules which would continue to see UK businesses adhere to EU laws. The EU is saying this is to create a “level playing field” and avoid UK businesses undercutting their EU competitors but the UK has said no sovereign state could continue to accept rules made in Brussels.
If a breakthrough does not happen soon then pound to euro and pound to US dollar are likely to fall further as investors nervousness of a no-deal Brexit increase and in the event of no-deal, the pound could fall by 5-10 percent. Although, if the UK and EU can reach an agreement, this would be an enormous boost of confidence, and could send pound to euro towards 1.20 and pound to US dollar towards 1.40.
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