GBPEUR: Chances of No-Deal Force GBP to Surrender Gains

Having enjoyed considerable gains across the board against it’s major currency parts on the back of softening support for the US dollar throughout last week’s trading, the pound has seen it’s position reverse as another twist in the Brexit saga hit the headlines during yesterday’s trading. The markets were arguably already bracing themselves ahead of fresh talks between the UK and the EU being held in London this week. This was reflected in the pricing of the pound on the international stage, with sterling trending in the higher extremes of it’s relatively tight ranges against the euro and the dollar since the end of August. Indeed GBPEUR has been hovering in the 1.11 to 1.12 mark whilst GBPUSD showed slightly more volatility, hitting as high as 1.33 on interbank rates.

Yesterday saw these ranges tested however, with speculation around Prime Minister Johnson’s potential legislation change shaking investor confidence once more. The PM has already insisted upon the mid October deadline by which time progress has to be made on talks or the UK is happy to leave without a deal at the end of the year.

Typically, when indications of a no deal or Hard Brexit have risen to the surface, the pound has tended to weaken over the course of the last 4 years since the referendum vote and so the concern for many holding sterling might be that we see similar trend here should this week’s talks prove unproductive.

French President Macron may have cushioned sterling woes, insisting a “very good exchange” was held with the UK PM, however it seems the focus here was on immigration control rather than the economic questions which tend to be heavier drivers for the currency markets of late

Understandably, this rumoured change in legislation is unlikely to sit all to well with EU diplomats, given it would undermine the withdrawal agreement agreed at the end of January of this year, when the UK formally exited the European Union.

Different media sources are hinting that much of this could be seen as posturing ahead of a busy week of talks, however the effects on the currency markets remain clear and could leave those with a currency requirement involving the pound exposed if their transfer is left unattended to.

What is Stopping the Pound from Falling Further?

As uncertainty starts to build once more there could be a strong argument for further sterling losses in the immediate future. Something that might help sterling keep its head above water however is today’s Inflation Report Hearing from the Treasury Committee. Investors will be looking out for a reaction following the considerable monetary stimulus provided by the Bank of England. We saw a clear shift in consumer spending last month, with footfall o the high street’s accelerating between June and July, something that was expected to continue in August across the UK’s hotspots. It will be interesting to see if this positivity filters through to today’s release, in which case added support for the pound could be expected.

Will GBPEUR Slip Back Towards 1.10 This Week?

Given the accelerated number of new cases in France and Spain, investors may have been growing wary of the potential impact on growth prospects across EU members should another spike occur.

Improvements in Business confidence and Consumer spending have been noted as lockdown measures have eased since the start of the summer however growth has remained muted, very much inline with other leading western economies. Investors will be looking for clues of a reaction however following the extra stimulus packages provided by the European Central Bank.

This morning’s Gross Domestic Product release for Q2 could add volatility to the mix, with a clearer picture of the economic effects of COVID-19 likely to arise. Employment change for Q2 could also be a market mover so we could see some change for the GBPEUR rate. Germany’s promise to extend their equivalent of the furlough scheme seems to have been received positively by the markets, so it will be interesting to see if there is a similar pricing shift around the euro as a result.

It might be worth taking note of this morning’s trade data out from Germany if you are in the market for euros. The limited capacity for production throughout the summer could lead to a drop in exports throughout Q3 and Q4. This has been a focal point for the European Central Bank (ECB) when deciding how to implement it’s recent rounds of monetary stimulus. Sustained contractions here from Europe’s Powerhouse Germany might force the ECB’s hand for further stimulus further down the road.

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