The Brexit trade agreement provided the pound to euro exchange rate with a welcomed boost, but the pound’s gains were limited and the pound to euro exchange rate did not reach the higher levels that some forecast. This could be put down to several reasons, firstly the market had already priced in a high probability of the UK-EU reaching a trade agreement so by the time the announcement came, investors had already largely accounted for the deal. Secondly, whilst a deal was agreed, the trade agreement was relatively basic and only covered goods.
The UK economy is almost 80% services driven and currently there is no trade agreement for services. There is talk of equivalence rules, which would allow the UK financial services sector to continue trading freely in Europe, but the EU once again appear to be trying to lock the city into such tight controls, it would make any divergence difficult. Lastly, the deal was announced on Christmas Eve, a time when most investors are closing their positions in wake of the Christmas holidays.
Unfortunately, the gains made by the pound to euro exchange rate were short lived as UK Prime Minister announced another national lockdown. The prospect of businesses closing their doors across the country for at least another 6 weeks does not bode well for the UK economy and markets once again have shunned the pound. However, despite the lockdown, there is hope on the horizon as the UK government quickly roll out the vaccine. On Monday this week, the Oxford University/AstraZeneca vaccine came into play, which has been touted as a game changer. The Oxford University/AstraZeneca vaccine is cheaper, more easily transported and more easily administered that its Pfizer competitor. The UK is second to only Israel, already vaccinating in excess on 1 million people, and the number is likely to increase significantly over the coming weeks as the government create more vaccination sites. Given the UK economy was one of the economies most affected by COVID, it is likely to be one of the economies that bounces back the most. As the vaccine is increasingly distributed, the prospect of the UK economy returning to some sense of normality will support a rise in the pound to euro exchange rate.
Will the Bank of England Move to Negative Interest Rates?
With the latest lockdown, talk of the Bank of England (BoE) moving to zero or negative interest rates has again resurfaced. The base rate currently sits at 0.1% and it has been suggested the BoE’s Monetary Policy Committee may look at negative rates, a suggestion the bank has Failed to rule out. A move lower in interest rates would put pressure on the pound although despite the latest lockdown I think it is still unlikely the Bank will sanction a move lower. Nevertheless, a move lower cannot be ruled out and this will of course make it difficult for the pound to euro exchange rate to edge higher.
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