Brexit Negotiations Remain Key to Pound to Euro Rate

Pound to euro held on to a weekly gain of 1% despite coming under heavy selling pressure Friday afternoon. The pound to euro exchange rate closed the week at 1.0915 having reached 1.1008 the day before and dipped to 1.0775 exactly 1 week prior.

The pound is being heavily influenced by on-going Brexit talks and the currency pair is highly sensitive to media headlines and information leaked from sources close to the negotiations. Brexit talks have been gridlocked for sometime as the UK and EU struggle to reach agreement on two key areas but it is the UK’s Internal Market Bill that has really set the cat amongst the pigeons. New UK government legislation would essentially see the UK introducing domestic law that would supersede the UK-EU Withdrawal Agreement that was signed less than 1 year ago.

The bill has caused great controversy and has left the EU threatening to pull out of negotiations completely if the bill is not withdrawn. The EU say not only would the bill break international law but the UK is now negotiating in bad faith and forgetting its ways. The bill has caused controversy at home too, not only among opposition MPs but also among Conservative MPs, some of who have been campaigning Brexiteers. However, the bill made it through the House of Commons in its first phase although it’s likely multiple amendments could be tabled to limit the effectiveness of the bill.

Unlike Theresa May, new PM Johnson has not been shy to stand his ground with the EU and has been clear that whilst the UK would like a trade deal, it would also be happy to leave on World Trade Organisation rules. It would not be out of context to suspect this latest stunt is one designed to push the EU into a compromise on the two sticking points that are currently preventing a trade deal.

The UK and EU are still struggling to reach an agreement on fishing and the EU’s level playing field demand. The EU is insistent that continued access to UK waters for EU vessels is a prerequisite of a trade deal but the UK has made clear it will take back full control of its waters and fishing access will be agreed separately. Secondly, and arguably the more sticky issue is the one of the EU’s level playing field. Here, the EU wants the UK to sign up to its rules so that UK firms do not have an advantage over their EU competitors. Quite simply, this seems to boil down to state aid and the ability of the UK government to intervene to support UK businesses. Boris Johnson is refusing to budge on this point too, but ironically it is the EU nations that have been guilty of state aid in previous years, not the UK.

On a positive note, the UK has since moved slightly on the Internal Market Bill and European Commission President Ursula von der Leyen stated on Wednesday that she is confident the UK and EU can reach a trade deal.

Pound Stutters on Prospect of Second Lockdown

As coronavirus numbers have been steadily rising across Europe and now the UK, fears of a second national lockdown are increasing. The government has already applied local lockdowns but is now feared the government is considering a national lockdown. The government considering a mass lockdown whilst the infection rate is rising but the death rate is falling, and when in the previous month suicide had a higher death toll than coronavirus is bordering on hysterical. However, it seems this is what is genuinely being discussed, which could have devastating consequences on businesses and halt what appears to be a v-shaped recovery to date. If a second lockdown does come into force then this could end pound to euro down as investor’s risk appetite reigns in and the economic outlook for the UK dampens.

The Bank of England is once again talking about negative interest rates and this has also brought the pound lower. The prospect of zero or negative interest rates would see a lack of inward investment to the UK and this would lead to a fall in the pound. The Bank has said that it is considering all options and that further quantitative easing is the likely first port of call but nevertheless, the fact the bank is considering zero or negative rates does not bode well for the pound. Many expect this would be in response to an economic slump and for now, UK growth is on the rise following an unprecedented 20% contraction in Q2.

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