The pound to euro exchange rate edged above 1.10 as markets remain cautiously optimistic that the UK and EU can reach a Brexit trade deal. Pound to euro has struggled to move below or above the 1.09 and 1.11 levels in recent trading as investors eagerly await greater insight on how the UK-EU future relationship will look.
Following Michel Barnier’s announcement that the EU is willing to compromise on their red lines last Wednesday in the European Parliament and the UK’s acceptance to restart trade talks, Barnier and his team travelled to the UK last Thursday. Negotiations were supposed to continue in Brussels this week, but it has been reported that Barnier will stay on in London, which has been a good sign that talks are progressing. Talks are expected to move to Brussels on Thursday.
However, the same two sticking points remain, that of the EU’s request for a level playing field and the second of fisheries. Progress appears to have been made on the level playing field issue, which is by far more important to the EU economy than fisheries as this would see the UK sign up to EU laws and regulations that would prevent UK businesses from undercutting their EU competition via means such as state aid. The Financial Times reported several weeks ago that the UK and EU had made progress on this point and an EU official also recently noted that the UK’s latest trade deal with Japan had greater guarantees than what the EU was asking, suggesting an agreement could be reached here.
The second of the two sticking points is that of fisheries, although the French revolt in this area appears to be diminishing as French President Emmanuel Macron has prepared French fishermen for a lesser catch of fish in UK waters. Although, despite an easing in Macron’s position there is still some way before an agreement can be found. Fishing is at the forefront of the negotiations as whilst less economically important, it is highly topical with both the UK and EU making it a key aspect of a future trade deal.
The intensity of trade talks is now at its highest as the UK and EU work around the clock to bridge the gap. The EU has always stated October end as the cut-off point for a Brexit trade deal but it’s likely this deadline will now also lapse. Markets now anticipate mid-November as the time for a potential deal to be announced.
When Will “Tunnel Talks” Begin?
“Tunnel Talks” is the term given when two sides conduct negotiations in secrecy with no public updates allowing both sides to make awkward compromises without fear of backlash. The UK had hoped to reach this point by Boris Johnson’s deadline of 15th October, noting significant progress but the EU refused saying not enough progress had been made.
There is still some work to do before both sides can enter the tunnel although EU sources have confirmed that 90% of an agreement is in place. The difficulty will circle around the compromises that each makes in respect of the level playing field and fisheries. These are issues where compromises could suffer backlash if announced publicly so these compromises will likely be made behind closed doors.
The pound to euro exchange rate is likely to remain in its current range until more can be confirmed. Michel Barnier will need to report back to the EU before tunnel talks can begin but, in the event, that tunnel talks start, then pound to euro will rise as optimism increases around the UK and EU reaching a trade deal. If the UK and EU then reach agreement, which would seem likely, pound to euro could rise to levels not seen since earlier this year. Of course, the UK’s flagging economy due to the pandemic and the Bank of England’s continued talk about the possibility of zero or negative interest rates will limit the pound’s gains but the Brexit decision will without doubt be the biggest drive in the direction of the currency pair.
A no-deal scenario cannot yet be discounted though, and should the UK-EU fail to reach agreement the pound will come under heavy selling pressure as the reality of trading on World Trade Organisation terms with its biggest partner sink in. In this event, pound to euro could fall below its 2020 low, which was just below 1.06 and test the all-time low of 1.02. Currently, markets are pricing in a 60-70% chance of a trade deal.
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