The pound to euro rate may be in for a rough ride in the short to medium term. The COVID-19 pandemic has had a huge impact on the markets and the varying degrees of lockdown can influence the currency in questions value. It seems the main vulnerability for the pound however is Brexit.
Boris Johnson has now made it official there will be no Brexit extension past 2020. The UK only have until the end of the month to call for an extension, then it will either be the case a deal is struck or Britain will leave the EU without a deal in place.
The investors’ biggest concern is a no deal scenario, as this could hit the pound hard. Boris Johnson is playing a potentially dangerous game; he may believe the limited period of time remaining to get a deal over the line will put pressure on Brussels to be more cooperative and make allowances on key issues such as the Irish border and fisheries. The problem is, Barnier does not seeming to be playing ball. He has a mandate and it looks like he is set to stick to it.
It is not in Brussels’ interest to give a favourable deal to the UK. If the UK were to come out with favourable terms then other EU members may follow suit. Italy for example have been far from pleased with the EU for sometime. There has been inner squabbling in the bloc in regards to emergency funding. The funding needs to be secured in order to combat the effects of the pandemic. Although some funding has been confirmed it is meagre in comparison to the US. I believe the total agreed so far in the Eurozone is around €1.2trl. The US has stated that emergency funding could run to over $8trl.
The split on the funding for the bloc seems strange and has caused controversy. Poland for example are set to receive more funding than Italy, who have of course been effected in a far worse manner by the pandemic.
If other EU members were to hold a referendum this would be likely to hurt the euro. Could it be the case that Brussels do not want to play ball in fear of creating a domino effect?
It could be the case that if the UK leave with no deal we may not be so much worse off. Sterling could weaken at first, but then potentially after some time recover due to getting better individual trade terms with other nations.
In the short term however, the pound is fragile. Without a deal in site Sterling will remain vulnerable. If you have a requirement buying euros with sterling it could prove wise to take advantage of GBP to EUR levels as they sit.
Bank of England Interest Rate Decision
The Bank of England (BOE) interest decision is on Thursday and this has the potential to cause volatility on the market. There have been rumours circulating that the BOE could be prepared to drop interest rates into negative territory to combat the economic effect of the virus. If we did see a cut in rates, a drop in the value of the pound is likely.
UK Retail Sales Data
UK Retail sales is also due out later on Thursday and this could cause some movement on GBP/EUR so is worth keeping an eye on.
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