Brexit Uncertainty Causes Volatile Day for Pound to Euro

The Pound to euro exchange rate experienced a day of high volatility during yesterday’s trading as Brexit negotiations took centre stage in the movement of the exchange rate. The Financial Times reported that negotiators had made enough progress to begin “tunnel talks,” which is a process where negotiations are continued in secret to finalise the final parts of a deal.

However, earlier in the day the EU launched legal proceedings against the UK in wake of the UK’s refusal to remove its internal market bill. The EU had stated that it would halt negotiations completely if the UK continued with the bill that would see parts of the Withdrawal Agreement overridden by UK domestic law, and breaking international law. The EU did not follow through with its threat to bring a stop to negotiations, but instead started legal proceedings. Although, this is arguably another move in political posturing between the two. At this stage of the Brexit negotiations, time is precious, and both the UK and EU know this. To pause progress for a bill that may not ever be needed would be a huge mistake for both sides. The internal market bill caused huge anger with the EU and certainly did not help the UK’s negotiating stance. EU officials were quick to line up to criticise the UK’s position and demand that the UK change its stance. The bill has been widely criticised by other nations along with some of the Conservative’s leading Brexiteers.

The pound to euro exchange rate fell on the announcement of the EU’s decision but bounced back quickly when a source close to the negotiations said that a landing zone on state aid had been identified. The EU’s level playing field demand and more specifically state aid has been one of the two sticking points that the UK and EU have been unable to find common ground on. The second issue has of course been the EU’s prerequisite that EU states access to UK fishing waters must be part of the trade deal. For now, it appears it is the latter that the two sides are furthest away on.

Pound to euro moved above 1.10 on this news after touching a low of 1.0922. It seems the UK government are quietly optimistic that a deal can be reached. Although, the leak is just the latest in a series of unofficial updates and markets are rightly cautious. The pound’s rally was short lived though as an EU official reportedly refuted the claim made by the Financial Times, sending the pound lower.

Where Next for Pound to Euro?

The EU has stated that a deal must be agreed by late October in order for the deal to be ratified by the European Parliament before the transition period ends, although UK prime minister Boris Johnson has said that if a deal isn’t secured by mid October then the UK will pull out of talks and prepare for a no deal Brexit. That’s less than 2 weeks, and with no option to extend the transition period beyond year end, pressure is mounting on the two sides to reach an agreement.

If the UK and EU can find a breakthrough then the pound to euro exchange rate could move up quickly towards 1.15 and target 1.20 by December. However, if an agreement cannot be reached the pound to euro could drift lower testing its all time low of 1.02.

The mid October EU Council meeting is the point seen by many when a deal will be struck. It is here that EU and UK leaders will appear together and are expected to hammer out the final compromises on a free trade agreement.

The EU has insisted that unless the UK’s contentious internal market bill is withdrawn, the EU will not agree to any deal. As such, it is likely the internal market bill, which has been stalled, will stay on the table until the UK and EU are close to agreement. At which point, the UK will withdraw the bill allowing the EU to complete on the agreement.

With so much at stake, the next couple of weeks promise to be volatile. As we saw yesterday, pound to euro is sensitive to Brexit headlines and the currency pair direction will likely be increasingly subject to these. Use the form below to get in touch and discuss an upcoming currency requirement.

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