Pound to Euro Rate Makes Nervous Gains as Brexit Stalls

Pound to Euro Rate Flat After Mixed U.K. Employment Numbers

The pound to euro rate bounced from a midweek sell-off yesterday, but the gains were muted as Brexit talks enter a “difficult phase”. The pound actually saw a one-year high versus the US dollar but much of this is related to weakness across the board in the US currency.

The pound to euro rate bounced from lows near 1.1000 to touch 1.1100 but the pair is lower this morning at 1.105.

Brexit at a ‘Critical Stage’ as Bearish Bets Build

The UK’s Business Secretary Alok Sharma highlighted what we all know when saying yesterday that, “We are at a critical phase”. Sharma added: “Right from the start of this process, we’ve always said that a deal can only be done if the EU recognizes that the UK is a sovereign independent nation”.

The comments underline the stalemate that has exists despite the talks being ongoing for over three years. The two sides have until year-end to come to an agreement or they will revert to WTO tariffs on trade. This is not the end of the world as a fresh set of talks can begin in 2021 but it would create uncertainty and potential volatility in the pound to euro rate.

In the options market, one-month risk reversals for the pound highlighted a rise in bearish bets against the pound. The ratio of long to short bets fell from to 2.7 yesterday after being at 0.9 two weeks ago. The current level was last seen in April when the GBPEUR was at 1.1500. The bets may have been made by participants seeking to hedge against open positions, but they signal rising concern about the pound.

Vaccines and ECB Interest Rates Will Dominate the Week Ahead

The European Central Bank (ECB) will meet next week to announce their latest interest rate and monetary policy decision. This could be an interesting meeting as it follows another set of lockdowns in the Eurozone and comes at a time that inflation is still on the floor in Germany and the bloc overall. The ECB were critical of the euro’s strength back in September and now we have the currency at yearly highs against the US dollar and still showing strength versus the pound. Policymakers talked of intervention previously and although that is unlikely in the open market, the Central Bank may see this meeting as an opportunity to talk down the single currency and cushion the economy ahead for Q1 until vaccines are rolled out across Europe. Currency markets may start to move on the race between countries to immunise vulnerable populations and get economies back open.

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