The odds are stacked against Sterling making any significant gains against the Euro due to the ongoing pandemic troubles and of course the small matter of Brexit.
There could be potential euro weakness as the bloc try and thrash out a mutually acceptable emergency package to combat the economic damage cause by COVID-19.
There has been rumours circulating that €1.3trl had been agreed and it will then be followed by a further €750bn, although the €750 would not be available until next year. The problem with the current plan is the funding is set to be distributed in what some nations consider to be in unfair fashion. For example, Poland are set to receive a far larger proportion of the emergency funding in comparison to GDP than Italy. This is despite the fact that Italy was one of the worst struck nations from the Coronavirus.
Although the amount of money to be injected into the Eurozone seems to be huge it is meagre in comparison to that of the US. The US could inject the economy with over $8trl to repair the damage caused by the pandemic.
With in-fighting expected between members of the bloc like a pack of hyenas squabbling over a piece of meat things could get ugly, which could provide an opportunity for short term Euro buyers.
The impact of this is likely to be muted, maybe a cent or so in the pound’s favour, but an opportunity none the less.
Pound Remains Fragile Due to Lack of Clarity Surrounding Brexit
One of the reasons the impact on the euro to pound rate is likely to be muted is Sterling’s fragility. The pandemic is one thing, but Brexit is really stifling any gains for the pound. Boris Johnson now has until the end of the month to announce an extension, something he is adamant he will not do.
Ideally he needs something agreed in principle by the end of the month otherwise the prospect of a no deal becomes much stronger. A no deal scenario is the investors’ worst concern, with some economists predicting a huge fall in sterling value should this eventuality take place. Commerz Bank have gone as far as to predict 1.02 on GBP/EUR. From a less pessimistic viewpoint though, it appears that to some extent a no deal scenario is priced in to current interbank levels. Let us look back to the day of the referendum where GBP/EUR sat at 1.30 or even a few months prior to the referendum when it sat at 1.40 +.
Euro sellers should really take this into account when they are looking to trade their currency, despite the probability of the market moving further in their favour , there has already been huge gains. It all depends on your attitude to risk.
UK Prime Minister Boris Johnson could be playing a dangerous game if he thinks he can get a deal over the line in such a limited period of time. Many believed Teresa May was a weak negotiator and the her stance in talks was weak. Could we about to find out it was simply Brussels stone walling our requests in an attempt to ward of other members of the EU following suit?
It is not in the EU’s interest to let Britain leave with a favorable deal in a quick fashion. If that were the case then other Countries could follow. Italy for example have not been happy as an EU member for sometime now and maybe the next candidate to call a referendum.
Overall it seems likely that the Pound will remain vulnerable until we have clarity on Brexit, so be wary of hanging on for any significant gains. GBP/EUR has not been above 1.3 since 15th May.
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