Pound to euro ended the week just below 1.10 as Brexit talks resumed but the UK and EU stated there is still some distance between the two sides positions. On Wednesday, EU Chief Brexit Negotiator Michel Barnier confirmed to the European Parliament that the EU was willing to compromise but the UK would need to compromise too.
The EU’s move was enough for UK Prime Minister Boris Johnson to confirm that trade talks could restart and no time was wasted as by Thursday negotiations were once again in full flow. After more than 4 years, the theatre is over as both the UK and EU firmly focus on trying to resolve the two key issues that have remained at large for so long.
The first area of contention is that of the EU’s demand for a level playing field that would require the UK to sign up to EU rules and regulations on issues such as state aid. The UK has long stated that Brexit must mean the UK can operate as an independent state and not be subject to laws made in Brussels. However, the Financial Times reported several weeks ago that the UK and EU had reached a “landing zone” on this issue, a platform in which an agreement can be made.
The breakthrough appears to have come from the trade deal that the UK recently reached with Japan. One EU official noted that the agreement the UK had reached with Japan went further than what the EU were requesting.
Focus has since turned to that of fisheries and the EU’s demand that a deal on fishing must be a prerequisite of a Free Trade Agreement. Fisheries is considerably less important economically to both the UK and EU although has been an issue of high political contention with the UK long citing it would look to take control if its waters and the EU demanding the same continued access.
French President Macron has been particularly stubborn and vocal on this point as he looks to protect the rights of French fishermen and with an election in less that 14 months, the French president wants to be seen to be doing all that he can to ensure access to UK waters for EU nation states does not change. Although, German Chancellor Angela Merkel quietly noted that a “no-deal” Brexit would mean EU nations have no access to UK waters.
Macron has subsequently warned French fishermen that they can’t expect to have the same access to UK waters and UK fishermen are likely to see an increase in their quota. It is unlikely the European Court of Justice will have jurisdiction over the new agreement, another aspect the UK had a serious concern with.
What next for pound to euro?
The UK and EU are both keen to reach an agreement and EU officials say the EU accepts trying to force through a deal that humiliates the UK, would only back fire at a later date. Therefore, the two sides are now working towards a genuine compromise. With both economies taking a significant hit from Covid-19, the last thing either economy needs is a “no-deal” Brexit.
Pound to euro has remained between 1.09 and 1.11, edging up on positive headlines and slipping back on negative ones. It is unlikely pound to euro will move far from this range until we get further direction on the Brexit trade talks.
If the UK and EU reach agreement over the coming weeks then the deal will need to be ratified by the European Parliament. This takes time but would be signed and sealed by 31st December avoiding the so-called cliff edge Brexit.
If a deal is reached then this will boost the pound to euro exchange rate which has long suffered due to the uncertainty surrounding Brexit, with the exchange rate moving up, once again targeting the 1.14-1.15. Markets are quietly optimistic that a deal can be reached and the pound will find its way back to higher levels.
However, whilst there is optimism and good intentions, a no-deal Brexit cannot be discounted and if progress stalls, there is little doubt the UK and EU will continue to work towards a deal but this would push the pound to euro exchange rate lower. It is unlikely that there would be a sharp drop unless the UK and EU stopped talks entirely, but a lack of progress could certainly send the exchange rate lower and an eventual no-deal Brexit could see levels of parity.
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