The pound to euro exchange rate fell to a 3-month low during Friday’s trading, touching 1.0837 in the wake of UK Prime Minister Boris Johnson’s comments that the UK could be heading for a no-deal Brexit. Whilst investors have always remained cautiously optimistic the UK and EU will reach a Free Trade Agreement, with such little negotiating time left and neither the UK or EU willing to compromise on the 3 outstanding issues, the prospect of no-deal appeared closer than ever.
However, Michel Barnier’s latest update to EU ambassadors was surprisingly more positive than many anticipated as he suggested a deal could be done as early this week if the UK was to compromise on fish. It is understood the UK has moved someway towards the EU’s demand on a level playing field but is refusing to give ground on fisheries.
Whilst economically insignificant to both the UK and EU, fisheries are the area proving most difficult to resolve. From a UK perspective, no sovereign nation in the world does not control its fisheries and this is a key part of being a sovereign nation. On the EU side, President Macron is keen to protect the rights of French fishermen as he looks to increase his popularity in the run up to the French election in less than 18-months.
With some movement on the level playing field, there is a feeling that a deal could be reached later this week. If a deal is not reached this week then negotiations could continue until the very last day of December. This is risky and would not allow time for the UK and EU parliaments to ratify any trade deal, but it is believed the deal would come into force regardless on the 1st January with ratification happening sometime in January. This is not technically legal, but the EU is famous for breaking its own rules when it suits and no lawyer within the European Commission will object to avoiding the cliff edge scenario.
Where Will the Pound to Euro Exchange Rate be by Year End?
The pound to euro exchange rate will almost certainly be driven by the outcome of the Brexit negotiations with other economic and political influences contributing significantly less. If the UK and EU agree a trade deal, which seems the more likely option then pound to euro could target 1.15 quickly and target higher levels as vaccinations are rolled out widely next year allowing the UK economy to return to some sense of normality.
However, a sizeable downside risk remains, and a no-deal Brexit could see the pound to euro exchange rate fall to 1.05 and below. Although, as we’ve seen with project fear, the gloomy forecasts have been miles away from reality and even with a so-called cliff edge, my bet is that after the initial shock, the pound to euro exchange rate will begin to climb back up as investors realise the economic impact to the UK has once again been way over egged.
Get in touch to discuss these factors in further detail as we head towards the end of the year and the transitional phase comes to a close. I’ll be happy to respond personally and discuss your requirements.