Confidence in Euro Grows Although Euro to Pound Remains Flat

Confidence in Euro Grows Although Euro to Pound Remains Flat

The euro to pound rate saw little movement during yesterday as the currency pair remained in a limited trading range around the .90 mark, closing the day just below. However, whilst there has been little change in euro to pound over the past month, less than 0.2 percent, the euro has experienced its best month in nearly 10 years against the US dollar.

Euro to US dollar has seen more than a 4 percent rise over the past month as investors take confidence in the EU’s rescue fund. The EU had come under increasing pressure to agree a financial package as the Coronavirus crisis took its toll on the Eurozone economy. Other governments including the UK and US were quick to react but whilst all EU nation states agreed to financial support, there were big questions over how it would be funded.

When EU states eventually reached an agreement, the market sort much relief, although more importantly the method in which the agreement had been made answered some questions over the bloc’s structural risk. Historically, the northern states, often led by Germany, have been against any type of debt mutualisation but for the first time in the EU’s history, the EU’s bailout fund will involve pooled debt, whereby those that contribute the most to the EU’s budget will be responsible for the largest part of the debt, regardless of which countries benefit.

Whilst the value of debt mutualisation was relatively small in the grand scheme of things and has been described as a one-off, it does set a precedent for the future. This has provided markets with significantly more confidence in the single currency and its structure and could support the euro considerably as the year goes on. After years of political squabbling, the bloc has finally agreed to a joint fiscal solution, which will go some way to reduce fears of a break-up.

Brexit Negotiations Remains Biggest Influence on Euro to Pound Exchange Rate

The biggest influence on euro to pound over the coming months remains the Brexit trade negotiations and whether the UK and EU can agree a trade deal. Talks between the UK and EU in recent weeks have showed little signs of significant progress with the UK and EU still at loggerheads over two key areas. The first being the EU’s access to UK fishing waters. The EU has always insisted that fishing rights must form part of a free trade deal although the UK has fiercely disputed this and said that fishing access must be agreed separately. Whilst this has been a major hurdle in the negotiations, it is thought that an agreement can be reached here. Michel Barnier recently stated that the EU may be willing to reconsider its position here but to what extent is unknown.

The second issue of controversy and arguably the most difficult to resolve is that of the EU’s demand to adhere to a “level playing field”. The EU has insisted that the UK continues to comply with EU regulations and that the UK firms are not able to undercut EU firms. The major sticking point here is state aid and the potential for the UK to offer breaks and/or incentives to firms later. EU Chief Brexit negotiator Michel Barnier has insisted this demand must be met whilst UK Chief Brexit Negotiator David Frost has said that no independent country could possibly sign up to the UK’s request.

However, despite the difficulties, many still expect the UK and EU to eventually agree a trade deal although a breakthrough is unlikely to happen until October when EU leaders meet and in the words of Michel Barnier “the clock is ticking”.

As we’ve seen over the past few years, euro to pound is sensitive to Brexit headlines and the currency pair will likely be volatile over the coming months. If signs of a trade deal emerge then euro to pound will fall as confidence in the UK quickly increases but if “no-deal” becomes a distinct possibility the euro to pound exchange rate could rise significantly, perhaps testing the all-time high of 0.98. Investment banks Goldman Sachs and Morgan Stanley have both recently revised their outlook for euro to pound with both seeing less upside for the currency pair due to more support for the pound, one of the major supporting factors being an increased optimism of a trade deal. Morgan Stanley is increasing the chance of a deal to 60% from 50%. Morgan Stanley are looking at a zero-tariff free trade agreement outside of the EU’s Single Market.