There has been only a difference of 1 cent between the high and the low of the GBPEUR exchange rate since the start of August with the rate spending the entire time between 1.103 and 1.113. It has been quite rare in recent years to have such a quiet week as there has been so many events that influence the value of the pound. The latest flat spell can be attributed to the fact that Brexit negotiations have taken a break these past two weeks and the UK recovery from the COVID-19 is looking to be moving forwards.
There is a real argument that as Brexit talks resume next week this may have been a ‘calm before the storm’ moment and we could see the currency pair once again come back to life. The EU and UK were appearing to be getting closer to some sort of top level deal on Brexit and yesterday UK Chief Negotiator David Frost suggested there could be a deal as early as September. A lot of the uncertainty over the last few years could quickly be lifted if a No Deal Brexit is removed from the equation.
Judging from the staleness in the market it is clear that investors are waiting to see how events unfold over the next few weeks before forming any decisions on where to leave funds. Once the Brexit talks become clearer we could see the return of some of the volatility that has been missing from the GBPEUR rate recently. If there is a deal, Sterling is likely to be the overall gainer, especially when you look back to February this year and the GBPEUR rate was up at the 1.20 level. The markets at that point believed a deal was possible as Prime Minister Johnson had a big majority and they expected talks with the EU to go well. Despite the disruption form the pandemic the UK Government has been adamant to get a deal sorted and that there should be no delay, it is no secret that the EU often get their deals done at the last minute so forcing the last minute sooner rather than later has always been the UK’s plan.
EU Unemployment and GDP Show Major Falls
This morning the latest Unemployment data for the EU was released and showed a decrease of nearly 3% in the number of unemployed which was considerably higher than forecasters had expected, however arguably not really a shock to anyone. Furthermore like the UK, earlier in the week the Gross Domestic Product (GDP) data was released which showed a fall of 12.1% from the previous quarter. This drop was not quite as sharp as the UK, however Europe was out of lockdown earlier than the EU so the recovery next quarter may see a smaller jump.
Once again, these results were unsurprising and this was expected following a six month lockdown across the whole block. The key readings will be how this breaks down country by country and if some of the Southern economies are considerably worse of than the Northern net contributor economies. The massive bailout package agreed by the EU nation last month will not come into effect until the start of 2021 so the recovery will certainly be a slower one with the EU. Once the likes of Italy receive grants and low interest loans it will be interesting to see of their economy receives a boost.
Next week there will be Inflation data for both the UK and the EU at the start of this week, which will then be followed by Retail Sales and Purchasing Managers Index (PMI). All of these readings will be closely watched as they will provide a insight into the speed of the COVID-19 recovery. The data will be for the month of July which from the UK’s perspective is when the economy came out of lockdown and elements of normality were resumed. This could mean some really positive numbers are seen as spending goes from essentially zero in June to pubs open in July. The PMI data will also be of real interest as this will provide the sentiment of business executives across industries. If these readings come back positive then this means there is optimism from businesses that the future is not all doom and gloom. If you’re looking to trade in the near future I would be more than happy to further discuss my thoughts above so please don’t hesitate to get in contact.