Over the last couple of weeks, the euro has been making good inroads against the pound and US dollar. The euro to pound exchange rate has increased from 0.8673 to 0.8919 and euro to US dollar EURUSD has risen from 1.0780 to 1.094.
Recovery Fund Strengthens the Euro
A key talking point for the euro over the last couple of weeks has been the recovery fund to help countries most impacted by COVID-19. Preciously countries like Germany and the Netherlands had made it clear that any country that borrows money from the recovery fund would have to pay it back themselves. As you would expect the countries that have been hit the hardest by this, which tend to be the ones that don’t have the infrastructure in place to cope, were furious with the decision.
However, in recent weeks German Chancellor Angela Merkel and French President Emmanuel Macron have come together and proposed a €500bn fund that will provided as grants and not loans. By doing this all member states will collectively take the debt of €500bn and struggling countries will not have to worry about paying back the debt on their own.
With many commentators in recent years suggesting that the European Union could begin to collapse once the UK leave the EU, this move by 2 key leading figures shows true unity. For that reason, this is one key reason why the euro has performed well against the pound and US dollar. In addition, another key reason for the euro strength is the data released by the Institute for Economic Research (IFO). They suggested that business sentiment in Germany has risen and exceeded expectation. The numbers rose to 80.1 in May from 69.4 in April. These numbers are important as the IFO survey 9000 companies in manufacturing, services, trade and construction.
A Tough Couple of Weeks for the Pound
UK mainstream media over the Bank Holiday weekend have been scrutinising the Prime Minister regarding is chief advisor Dominic Cummings. Mr Cummings drove to Durham to self-isolate at a family farm so his child could be looked after, however the Government’s guidance that made mainstream media was for people to stay at home. Mr Cummings has made it clear that he hasn’t broken any laws and the debate goes on, however this debate has overshadowed what’s really important in these times and that’s how the UK can save lives and get back to some form of normality in the weeks and months to come.
The Prime Minister did announce this weekend that he plans to reopen all non-essential shops by the 15th June, which can only be good news for the pound as retail sales numbers plummeted last week and this will also get millions of people back into work. Guidance has now been published for retailers to adhere to, however these plans could change if the R rate increases.
Brexit to Impact EURGBP Exchange Rates
Looking ahead I expect the Brexit negotiations will start to take centre stage in driving EURGBP exchange rates. It was only last week that Chief EU negotiator Michel Barnier told the press that its unlikely that a deal will be reaches as the UK need to negotiate. Further trade negotiations are set to take place next week. Following those negotiations there is an EU summit middle of June and then the deadline for a Brexit extension is the end of June. Therefore the UK need to be confident that they will secure a deal otherwise the UK could end up crashing out at the end of 2020. Over the last couple of years anytime the UK gets close to leaving without a deal the pound suffers. Therefore if its an uncertain June, the pound could continue its decline against the euro. Good news for any clients selling euros to buy pounds.
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