Pound to Euro Rallies on Further QE but Brexit Concerns Remain

The pound to euro exchange rate gained 0.2 percent during trading yesterday, as the Bank of England announced a further £150 billion of quantitative easing (QE) to support the UK’s stalling economy. The bank’s Monetary Policy Committee members were unanimous (9-0) in their vote, pushing the pound to euro exchange rate back above 1.11.

The bank has now borrowed £895 billion although there was no change in interest rates, which were left at 0.1%. The bank has left the option of zero or negative interest rates on the table, but no mention of a change yesterday, further supported the pound to euro exchange rate. Investors have struggled for clarity on whether the bank will reduce rates, which has added pressure to the UK currency, and some thought a surprise cut may come as early as yesterday. However, with no mention of a change in rates, investors took confidence from the larger than expected injection of QE. Market expectation had been for an additional £100 billion despite several media outlets reporting the bank was planning a further £200 billion. These leaks proved to be unfounded but perhaps limited the pound’s gains on the day.

Despite the boost for the pound, the lack of progress in the Brexit negotiations is likely to limit a move upwards. The latest update from Chief Brexit Negotiators Michel Barnier and David Frost confirming that whilst both the UK and EU were working hard towards an agreement, there remained significant differences on the issues of fisheries and the EU’s demand for a level playing field. After two weeks of negotiations, progress has been made but compromise on both sides will be required if a deal is to be reached over the coming weeks.

Talks will now restart in London on Monday and will likely continue for another two weeks before the EU leaders meet at the next EU summit on the 19th November, where markets anticipate a deal could be confirmed, although, it is likely we will see progress before this point. Fisheries remains unresolved and with a stubborn Emmanuel Macron still demanding unchanged continued access to UK waters for EU states, it is likely the UK will need to concede some ground here to reach a compromise.

At present, the UK has insisted it will be taking back full control of UK fishing waters but with fisheries counting for less than 1 percent of UK and EU Gross Domestic Product (GDP), this will be a political rather than economical win. As the EU is aware, it is the level playing field guarantees that it wants the UK to sign up to. This would ensure UK businesses would be competing with their EU counterparts in a fair manner.

Pound to euro is likely to remain in its current trading range but if the UK-EU can make steps towards a trade deal then the currency pair could quickly gain several cents. However, without a breakthrough, the pound will come under selling pressure and could find itself drifting lower back to levels seen earlier this year.

Dollar Weakens as Markets bet on Biden Victory

The pound to dollar exchange rate rose more than 1.1% as Democrat Biden neared the Whitehouse. As postal votes continue to be counted, which largely favour the Democrats, investors are betting on a Democrat Whitehouse. Current president Donald Trump has tried to halt the flow and count, citing fraud but with no evidence to support such claims. As such, whilst Trump is huffing and puffing, and threatening legal action, most believe it is only a matter of time before Biden claims his victory.

The Democrats will have control of the House of Representatives, but the Republicans will retain control of the Senate making it difficult for legislation to be passed. This is a problem for the Democrats but arguably provides some comfort for investors as it makes big changes more difficult. Either way, it is likely that a Democratic government will look to improve and increase support to the US economy in the wake of the pandemic.

Assuming a Biden victory, pound to dollar could weaken further and could push above 1.32 in the short-term although it will be Brexit trade negotiations that have the most impact on this currency pair. If the UK and EU agree a trade deal then pound to dollar could move beyond 1.35 but if the UK and EU fail to reach an agreement, then the exchange rate could quickly find itself falling back towards 1.25 and lower.

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