The pound to euro exchange rate climbed back above 1.10 on Friday as investors increased expectation of the UK and EU reaching a trade deal. Pound to US dollar also rose above 1.30. However, despite increased optimism around a deal being struck, there is still a long way to go as the UK and EU still try to resolve two key issues.
The first issue is that of the EU’s request for the UK to agree to a “level playing field”. This was always seen as the more difficult of the two issues although since the Financial Times reported a source close to the negotiations had said a landing zone had been agreed, other sources have also confirmed progress has been made in this area. The EU has been insistent that firms operating in the UK are not able to undercut their EU competitors and that the UK must agree to follow EU regulations and standards in particular areas. This of course is incredibly difficult for the UK to agree to when one of the main points of Brexit is “to take back control”. Nevertheless, it appears that reasonable progress has been made on this point and a compromise could be reached.
The second issue, which is less important economically but arguably more important politically is that of fisheries. The EU has always insisted an agreement on fisheries is a prerequisite of any trade deal and that EU states must continue to have access to UK waters. Most EU leaders appear willing to compromise here but Emmanuel Macron is digging his heels in and seems unwilling to accept anything less than the status quo. With a French election not too far away, the French leader wants to be seen to be protecting French interests. However, Macron’s stubbornness has the potential to scupper any deal reached.
Michael Gove recently said that he sees the chance of trade deal at around 66 percent, an increase of 33 percent from last month, which is encouraging but by no means provides us with any certainty.
Where Next for Pound to Euro?
UK and EU leaders have remained relatively tight-lipped on detail only acknowledging there had been significant progress. However, we cannot assume the muted tone is positive. Focus will be on the EU summit this Thursday when EU leaders will gather for the EU Council summit meeting. It is here that we are expected to get a good insight as to where negotiations have reached. This is also the day that Boris Johnson has confirmed as his deadline to see significant progress. Otherwise, Boris has threatened to walk away form the negotiations. Few believe the UK will walk away at this stage though, and Boris will likely use something to deem the necessary progress has been made.
The real deadline is the EU’s deadline for month end. If an agreement is not reached by then, then the European Parliament will not have time to ratify the trade deal before the transition period ends. There has been speculation that trade talks could continue into November and even possibly December but if the current deadlock can’t be broken with the highest political leaders meeting with less than 2 months on the clock, then can it be broken at all?
The UK has proposed a 3-year transition period on fisheries but the EU has yet to respond as the fisheries point is causing issues between EU states. The majority see the level playing field as far more significant than fisheries from an economic and trade perspective but fisheries is a hot political topic in several EU countries.
If the UK and EU can show reasonable progress by the end of this week then that’ll pave the way for deal to be reached in the coming weeks, which could see pound to euro rise by 3-4 percent as the prospect of no-deal falls away. This could also set the tone for a gradual push towards 1.20 by year-end. However, markets do appear more comfortable with the current situation than perhaps they should given the lack of conclusive information we have so no-deal remains a distinct possibility. If the UK and EU cannot find a way to break the deadlock, then pound to euro will drift lower, maybe falling below March’s low of 1.0608. The pound to euro exchange rate will continue to be sensitive to Brexit headlines and we could see increased volatility at the end of the week as the pressure reaches boiling point. Get in touch to discuss these upcoming factors in more detail, and the tools available to limit your exposure to the changing currency markets using the form below.