Euro to Pound Rallies Despite Forecast Record Contraction

Euro to Pound Rallies Despite Forecast Record Contraction

Euro to pound extended its gains during yesterday’s trading climbing 0.25% on the day and more than 1 percent on the week. Euro to pound now sits at 0.9132, comfortably above the 0.9100 resistance level that it struggled to break with euro bulls targeting another move up.

US dollar weakness has meant investors have diversified away from the global safe haven currency and the euro to US dollar exchange rate has surged almost 3 percent in the past week from 1.1427 to 1.1754. The lack of appetite for the US dollar has benefitted the euro and the single currency has made gains across the board.

This week sees the Eurozone release quarter two growth data and investors expect record breaking numbers. Market consensus is for a crash of 15.6 percent for the period April to June, which is 4 times higher than the 3.6 percent contraction recorded in quarter one.

The impact of the COVID-19 crisis has been felt differently by Eurozone states. Germany is expected to have fared best, their shutdown was less restrictive than other countries and the large manufacturing sector was less vulnerable to the lockdown. Whereas France, which has a much larger services sector, will likely feel a bigger squeeze. Other countries such as Greece, Spain and Portugal that share a heavy dependence on tourism will be among those affected the most as the crisis brought the tourism and travel sector to an abrupt halt. Even now, fears of a second wave and an increase in COVID-19 cases, particularly in Spain, which has just seen the UK impose a 14-day quarantine for holidaymakers returning from the country, are making it difficult for these nations to get back on their feet.

Germany could see a contraction of 9% for second quarter and Spain could be looking at double that at 18%. The Eurozone has launched an unprecedented level of quantitative easing, €1.35 trillion to deal with the COVID-19 crisis and has just agreed a further €760 billion rescue package, which will kick in next year when the next 7-year budget starts. The €750 billon will be a mixture of grants and cheap loans, and those nations most in need will receive the lion’s share of financial support. For the first time in the Eurozone’s history, the debt will be incorporated within the budget, meaning debt mutualisation so those countries that contribute most to the EU’s budget will pick up the greatest share of the debt, regardless as to how much they’ve benefitted.

Brexit Trade Deal to Shape Euro to Pound Rate

With so many uncertainties right now, the euro to pound exchange rate is exposed to a multitude of risks, but the main driver in this currency pair remains the Brexit trade talks. Despite positive vibes and a constructive tone in previous weeks, both Michel Barnier and David Frost announced last week that the talks were deadlocked, with both chief negotiators blaming the other for the lack of progress.

The key sticking points remain with little sign of compromise. Firstly, the EU has demanded that there’ll be no Free Trade Agreement (FTA) unless a fishing agreement is reached allowing EU states continued to UK fishing waters. The second area of dispute is the EU’s demand for the UK to sign up to a “level playing field” which would see UK business continue to adhere to EU law with the ultimate resolution being the European Court of Justice.

UK prime minister Boris Johnson has confirmed that the UK will not agree to these terms and with Brussels refusing to budge, the prospect of “no deal,” and the UK and EU trading on World Trade Organisation terms has spooked markets.

As we’ve seen so many times before, the euro to pound exchange rate rises when the prospect of no-deal increases and falls when it seems the UK and EU will stay closer aligned. Euro to pound is likely to remain sensitive to Brexit headlines and will be open to increased volatility as we approach the autumn months. Michel Barnier has often cited “the clock is ticking” and it certainly will be if we reach September with little or no progress.

Despite the no deal rhetoric voiced by both parties, most expect a deal to be done, although it may not be as comprehensive as some would like. Nevertheless, a basic “no tariffs” trade deal with a few add-ons will be welcomed by the markets and finally send euro to pound lower as confidence returns to the UK. However, should the UK and EU not reach an FTA, then expect euro to pound to race higher, potentially testing and breaking the all-time high of 0.98.