Concerns around the UK/EU trade deal from Chancellor Sajid Javid have strengthened the euro against the pound over the weekend. Javid noted that the UK would not seek alignment on EU regulations nor would they form part of the basis for their future trading relationship.
These comments have weakened sterling against the euro somewhat. Moreover, after underperforming slightly last week against its rivals, there could be more of a sell off of the euro this week, ahead of the IHS Markit PMI survey results.
Regulatory Divergence Hits Currencies
The Chancellor’s comments weakened the pound to sterling rate by about 0.17% at the time of writing, as the EU wants to have as much alignment with the UK as possible. If the UK were to secure a deal as hinted by Javid, then there would potentially be limited access to EU markets. This regulatory divergence could threaten a smooth trade deal, and might even reduce the possibility of zero tariffs on goods traded between the UK and the EU.
EU Commissioner Ursula von der Leyen said during her UK visit at the beginning of the year that she sought close alignment, and the more the UK diverges, the less accommodating the EU would be on a trade deal.
Euro under US pressures
Last week, the euro ended trading .26% lower vs the dollar on Friday. We can attribute this to US/EU trade tensions which have caught the markets’ attention. The euro was already feeling pressure from reportedly strong retail sales from the US, as investors re-evaluated the United States’ short-term outlook.
What to Watch for the Euro
All eyes will be on the European central Bank’s (ECB) interest rate decision this week, due on Thursday. Interest rates and policies are expected to remain unchanged, but the markets will pay attention to every word in the statements and press releases to gauge any clues as to the bloc’s future economic outlook.
We’ll also be scrutinising Friday’s PMI surveys for any hints towards what the euro’s outlook is for 2020. December’s IHS Markit PMI numbers for manufacturing and services were revised up earlier in January, which gave the euro a little boost. However, we’ll be watching January’s “flash” numbers with great interest. Any disappointments are bound to hit the euro in some form.
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