The pound to euro rose above 1.1100 at one point during yesterday’s trading as the UK government confirmed it would not walk away from trade negotiations mid-October as it had previously threatened to do. Pound to euro traded as low as 1.0962 at its lowest point and closed at 1.1080 in which proved to be another volatile intra-trading day.
The announcement from the UK confirms the government believes a deal with the EU can be reached and that progress has been made although few ever really believed Boris would walk away at this stage. After all, neither the UK nor EU want to be the side responsible if a deal is not reached. The real deadline is the EU’s deadline, which is October end. Whilst the transition period does not expire until December 31st, a trade deal once agreed, will need to be ratified by the European Parliament and this takes time.
Optimism is increasing that the UK and EU can reach a deal, which will boost the pound to euro exchange rate, but investors remain cautious as the two key issues of fisheries and the EU’s demand for a level playing field remain unresolved. However, focus now appears to be on fisheries, suggesting this is the stickier of the two areas. Whilst the level playing field is without doubt the greater economic concern to the EU, fisheries is very important politically. As such, Macron has threatened to pull the plug on any deal if the EU does not maintain the current access rights to UK fishing waters. With a French election in 14 months, the French president wants to be seen to be protecting the rights of French fishermen, although given fishing accounts for less than 1 percent of EU GDP, it is difficult to imagine the EU would scupper a deal if the more important level playing field is met.
EU leaders will meet today and tomorrow at their European Council summit, where Brexit trade negotiations will be primary focus. Leaders will discuss what concessions can be made in order to get a deal across the line in the next few weeks. The EU’s response will be crucial to the direction of pound to euro and the exchange rate is likely to remain highly sensitive to Brexit headlines. Whilst Macron is pushing for the status quo on fishing, many other EU nations concede the EU have to make a concession so there’s likely to be internal differences as the EU try to reach a compromise that accommodates the interests of all nation states.
Where Next for Pound to Euro?
Whilst it seems there has been zero progress on fisheries, the fact the focus has shifted to this suggests the level playing field demand is now less of a concern. France, Ireland and Spain have been particularly vocal on fisheries, but most other states are far more concerned by the UK’s commitment to follow a level playing field and not be able to undercut their EU competitors. This of course, is of much greater significance.
I’m cautiously optimistic that the UK and EU will reach an agreement over the coming weeks, avoiding the so-called cliff-edge as it is hard to believe that a Free Trade Agreement would fall short due to something that has such little impact on GDP both in the UK and EU. However, as with politics, we cannot be overconfident and never underestimate the ability of the political elite to make huge misjudgments.
After more than 4 years, it does now seem we are reaching the end of this Brexit saga and a deal is closer than ever. If the UK and EU can agree a trade deal in the coming week’s then pound to euro could rise to 1.15 although the UK’s coronavirus response could hinder the pound’s gains as the UK’s economy woes will once again come under increased scrutiny. In addition, the Bank of England’s continued rhetoric around the introduction of negative interest rates is likely to place pressure on the pound as zero or negative interest rates will deter foreign investment into the UK. In a time when markets are looking for clarity and certainty, the Bank’s response has been anything but.
The downside risk cannot be ruled out though and if the UK and EU cannot reach an agreement this month, then pressure will increase on the UK currency sending pound to euro lower. In this event, it is likely negotiations will continue beyond October the prospect of no-deal will increase significantly as an agreement at such a late stage would result in the UK and EU having to find some way to extend the transition period to give time to ratify the deal. Get in touch using the form below to discuss these factors in more detail, and the options available to help you limit your exposure to the quickly changing currency markets.