The pound to euro exchange reached a 2-month high during yesterday’s trading as news of a Covid-19 vaccine and increased optimism of a Brexit trade deal boosted the currency pair. Pound to euro was up more than 1 percent at one point, trading at 1.1250 although finished the day consolidated just above 1.12. Pound to dollar saw similar gains, reaching 1.3270 before holding comfortably above 1.32.
The major break was confirmation that pharmaceutical giant Pfizer could soon have a vaccine in place to combat the coronavirus pandemic. Testing has shown the vaccine to be over 90 percent successful in trials to date and the vaccine could be available within a matter of weeks. The UK, along with the US will be at the front of the queue, having ordered 40 million doses, which will go a long way to getting the UK economy back on its feet quicker than others.
The pound also benefitted from an increase in investor’s risk-appetite. As we’ve seen over these past few years, the pound has become increasingly sensitive to market confidence and news that a vaccine could finally put an end to these dreaded lockdowns, has only furthered the pound’s gains.
Investors have also increased the possibility of the UK-EU reaching a trade deal after the UK signified that it may be willing to compromise on fisheries, which has been one of the two key stumbling blocks. Whilst the UK has signified it still intends to take back control of its waters, the UK has indicated that it may be willing to look at an agreement for several years as opposed to the annual terms that had previously been expressed.
Fisheries, along with the EU’s demand for a level playing field have been the two stumbling blocks with one EU official recently stating that 90 percent of the trade deal had been agreed outside of these two points. The level playing field is what is economically important to the EU as this will prevent UK businesses from undercutting their EU competition via means such as state aid. However, fisheries, which accounts for less than 1 percent of UK and EU GDP is a highly sensitive issue with both the UK and EU having previously drawn out clear red lines on what they would accept. The UK stating it would take back full control of its waters and the EU saying a deal on fisheries was a prerequisite of a trade deal. It is unlikely that either party will compromise fully so middle ground will need to be found, which in turn allows for both the UK and EU to walk away from the deal with a win.
The question now is will the EU also compromise on their red lines? Following the election of US president Joe Biden who fervently opposed Brexit and cited his concerns over the UK’s Internal Market Bill and its impact on peace in Northern Ireland, will the EU now try to extract more from the UK?
Where Next for Pound to Euro?
Whilst the pound has received some welcomed support, the market is still conscious of Brexit and pound to euro is unlikely to rally much higher without further news on the Brexit trade talks. If the UK-EU can agree a trade deal, then the pound to euro exchange rate could quickly target 1.15. EU leaders will meet at the EU Summit on 19th November and it is hoped there will be a deal to put in front of them. That’s 8 days away and it is likely we will soon gain insight into exactly where the UK and EU are in respect of their trade talks.
Whilst markets are increasingly optimistic, a no-deal scenario cannot be ruled out and a lack of progress in negotiations this week will concern investors and could send pound to euro lower. This seems less likely, but nevertheless, is still a possibility. In the short-term the outcome of the Brexit trade negotiations will remain the key driver behind the pound to euro exchange rate and the currency pair will be sensitive to Brexit headlines.
The pound could also benefit of Pfizer’s vaccine progresses in the way that is hoped. There are still lots of questions around transportation and who will be offered the vaccine first but it seems the UK government are beginning to look at these, with suggestions that care homes and the elderly will be top of the priority list and questions over whether children will be vaccinated at all.
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