Pound to Euro Forecast – Brexit Talks Continue, Again……

minimal market movement so far for Sterling exchange rates

The pound to Euro exchange rate is still supported at the higher levels in its recent trading range with levels sitting just above 1.12 for the GBPEUR pair. This week saw a positive start for GBP exchange rates after the announcement of another vaccine, this time developed by Oxford University & AstraZeneca. This week has seen continued Brexit trade talks between the UK and EU and there has been some optimism that a deal could be found this weekend. Of course last Monday had been set as the final date for a future trade deal to be reached to allow sufficient time for it to be translated and ratified. After one of the EU negotiators with struck with coronavirus last week the face to face intensive negotiations were brought to an abrupt end with talks returning to a virtual basis.

European Commission President Ursula von der Leyen said that Brexit talks had made “better progress” last week. She said “After difficult weeks with very, very slow progress, now we’ve seen in the last days better progress, more movement on important files.” Nonetheless she also reiterated that a deal was still not certain. The Financial Times reported that that there may have been some positive steps forward for settling rules on state aid subsidies but the three core sticking points of EU fishing in British waters, the level playing field and how to enforce a potential deal remain problem areas.

In the area of fisheries the UK last week proposed a temporary arrangement that acknowledges that UK fishing would need to develop which would take time to build capacity. The proposal would allow the EU to have a reasonable access until such time. Crucially though as the FT reports the UK rejects the EU’s demand that a free trade agreement with tariff free access to the single market should be linked to continued European access to British fishing waters.

Those with pending requirements would be wise to pay close attention to all the latest developments as any breakthrough for a deal or move towards no deal preparations could see a sizeable shift in in the pound to Euro. Some commentators are not so sure a deal will be reached. Ian Tew, head of G10 FX spot trading at Barclays said “We think a deal will be done but is next week really a crunch time? We’ve been down this road before.”

Other commentators are putting emphasis on the next EU summit 10th and 11th December as an important time in the calendar. Silvia Dall’Angelo, senior economist at Federated Hermes said ”Investors would probably get a lot more nervous if the EU council meeting on December 10 and 11 passed without any sign of agreement. In a scenario of a no trade deal, the pound could reach parity against the Euro, at least initially.”

UK Chancellor Rishi Sunak spoke yesterday as he delivered the government’s spending review. He highlighted that the economic emergency had only just begun and that an extra £55 billion would be needed for coronavirus in the next financial year. He said that Britain will boorow £400 billion next financial year to pay for the hit to the UK economy. Whilst the pound was given something of a boost after the Pfizer vaccine was announced the markets are still unsure for the future of the United Kingdom with Brexit and COVID-19 and to a certain extent the possibility of another Scottish referendum.

UK economic data has been particularly light this week but there were some interesting numbers across the Purchasing Managers Index data. The services sector which comprises the largest part to GDP declined although that drop was not as sharp as had been expected. UK PMI for the services sector fell to a six month low of 45.8 down from 51.4 last month. The manufacturing sector data however arrived better than forecast at 55.2 for November which was up from 53.7 the month prior. The mixed data points to something of a two speed recovery with manufacturing seeing a boost from the global economic recovery whilst the services sector has proven more susceptible to changing COVID restrictions.

There is one caveat here though and that is it is manufacturing firms have been pre-purchasing due to Brexit uncertainty as the transition period comes to an 31st December 2020. EU customers have been trying to take delivery for orders early whilst UK manufacturers have been increasing capacity which is likely to be skewing the figures.

The pound to US dollar exchange rate could be set for higher volatility going forward with a new President and administration at the start of the transition following the presidential election. Get in touch to discuss these factors in more detail using the form below, I’ll be happy to respond personally to discuss your requirements.