Pound to Euro Rises as Hopes of Brexit Trade Deal Increase

Pound to Euro Rises as Hopes of Brexit Trade Deal Increase

The pound to euro exchange rate rose more than 0.25 percent during yesterday’s trading as the media reported the UK and EU could reach a trade agreement as early as next week. It is understood that Chief Brexit Negotiator David Frost has told Prime Minister Boris Johnson that a “landing zone” could be agreed with the EU before Tuesday. Whilst the pound to euro exchange rate edged up, markets are cautious due to the lack of genuine insight into what is actually happening behind closed doors.

The official status of the UK and EU remains they are working constructively towards reaching an agreement but there are still big differences on the key issues of fisheries and the EU’s demand for a “level playing field”. As such, it is unlikely the pound to euro exchange rate will move far from its current trading range until further concrete information is provided.

Markets had targeted this Thursday’s EU Summit as a crucial date and the possibility of a deal being announced. However, as we’ve seen with so many deadlines, it appears this EU summit will pass without the UK and EU having a deal to put before the European leaders. In fact, whilst deadlines continue to be set and then missed, it is believed that the true deadline could as late as the 31st December. Of course, this leaves no time for the European Parliament to ratify a trade deal but if the UK and EU reach an agreement at this late stage, there isn’t a lawyer within the European Commission or UK government that would object to the UK and EU being creative with the legal text, enabling the time for the deal to be ratified and avoiding the so-called cliff-edge.

Instead, this Thursday’s meeting now looks like a point where EU leaders could review their negotiating mandate again, in order to edge closer to a compromise. Despite the EU’s fierce redlines, the EU has moulded its position many times since negotiations began. We have seen the EU shift from demanding the UK signs up to its state aid rules and policies to saying it would accept the UK’s own equivalent rules. We have also seen the EU ease its demands in regards to environmental and labour market rules. A deal will require compromise from both the UK and EU and with time fast running out, those compromises need to be made soon. The can cannot be kicked down the road anymore.

Where Next for the Pound to Euro Exchange Rate?

Whilst the pound to euro exchange rate has remained in relatively slim trading this past couple of months, markets are preparing for a big move in the coming weeks. If the UK and EU can reach a trade agreement then expect pound to euro to rally as confidence resumes in the UK economy. Pound to euro could quickly target 1.14-1.15 for the first time in months and move higher in December, particularly if the UK comes out of lockdown and Covid vaccines enter circulation.

On the other hand, a no-deal Brexit cannot be ruled out and it has often been said that Boris Johnson is one of the strongest voices in the room when it comes to compromising UK sovereignty to secure a free trade deal with the EU. A no-deal scenario would cause immediate panic and see pound to euro fall but when you look at the projected difference in GDP over 10 years, which is just 3 percent or 0.2 percent per annum (the government’s own forecast), is the prospect of a deal really worth the possible compromises that could have to be made? After all, Brexit has always been about making and abiding by our own laws and not being ruled by Brussels.

The days of a “hard” or “soft” Brexit have long passed as the UK relinquished any chance of a Norway type deal that would see the UK stay part of the EU’s Single Market. Instead, the UK simply wants the same deal that was originally offered to Theresa May but has now been withdrawn, the Canada style agreement, although the EU are no longer prepared to offer this. In the same way, EU leaders have continually criticised the UK’s “we’ll have our cake and eat it” approach, in these final weeks, ironically it is Emmanuel Macron and several other European leaders that feel they have a natural right to maintain fishing access in UK waters. It’s hard to see how Macron can keep a straight face.

In summary, we could see the UK and EU find common ground and reach an agreement over the coming weeks. There seems to be genuine efforts to find a fair balance on the EU’s level playing field demand and despite the political posturing around fisheries, would the UK and EU really squander the opportunity to sign a free trade agreement over something as economically small as fisheries?

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