Pound-Euro Week Ahead Forecast: Eyeing 1.13 as Brexit Deal Births New Era in UK-European Relations

- GBP/EUR set for tepid recovery to 1.12, 1.13 into year-end.
- Brexit trade deal heads for provisional application in Europe.
- UK parliament set to provide show of support 'in principle'.
- Closing a chapter in Brexit saga, before opening another.

Above: File image. Prime Minister's Europe Advisor and Chief Negotiator David Frost host talks with chief negotiator for the European Union Michel Barnier inside No10 Downing Street. Picture by Andrew Parsons / No 10 Downing Street

• GBP/EUR spot rate at time of writing: 1.1144
• Bank transfer rate (indicative guide): 1.0854-1.0932
• FX specialist providers (indicative guide): 1.0977-1.1066
• More information on FX specialist rates here

The Pound-to-Euro exchange rate is on course to end the year at six-month highs around 1.13 as the House of Commons gives an in-principle approval to Britain's Brexit deal, which will birth a new era in UK-European relations while also carving out a permanent place for Brexit matters in domestic politics.

Prime Minister Boris Johnson and allies have been keen to stress that the 'war is over,' since declaring victory from Brussels last week following more than four-years of negotiations, the result of which has been a zero-tariff and zero-quota trade agreement accompanied by some key compromises from both sides.  

It's pie in the sky or 'for the birds,' to suggest that Britain's peaceful if-not polite civil war over its relations with the EU is in any way close to a conclusive end. But nonetheless, the agreement thrashed out by negotiator David Frost, his European counterpart and Prime Minister Boris Johnson as well as his opposite numbers in Europe does set the stage for a new era in UK and EU relations after averting an uneccessary economic as well as financial 'cliff edge.'

"Despite this being one of the hardest possible Brexit outcomes, it allows for both parties to establish a cooperative platform and possibly allow for improvements eventually," says Christian Keller, head of economic research at Barclays. "This has been made possible by last minute compromises on fishing as much as level playing field requirements, with member states given very little time to rubber stamp the final draft."

The averting of a cliff-edge and continuation of tariff-free trade is most notable for Sterling and could be enough to lift the main British exchange rate GBP/USD to back to its earlier high near 1.3650 or even as far as 1.37 in the week ahead. This would in turn imply an increase that takes the closely connected Pound-to-Euro exchange rate first back to 1.12 and then up toward 1.13 as year-end approaches, so long as the EUR/USD rate remains stable near 1.22.

 Above: Pound-to-Euro rate at 4-hour intervals with GBP/USD (orange) and EUR/USD (blue).

Further gains beyond there could be slow to materialise however, according to some analysts, as investors may remain cautious for a while yet. Commerzbank forecasts the Pound-to-Euro rate will advance to 1.15 early in 2021. 

"Some further GBP gains might materialize today or during subsequent trading sessions, as some slow market participants might push GBP further. Those who have built up GBP hedges over the last 5 years might not be keen to close them within hours. But they might follow up in the next weeks (or even months," says Ulrich Leuchtmann, head of FX strategy at Commerzbank in a Thursday commentary. "However, persistent GBP strength would be unjustified." 

Proof that this Brexit deal takes back control will rest on all the laws and taxes the government now improves or repeals to make our lives better. I’m sending them a list of proposals. See https://t.co/8ZUuM6CZ0U.

— John Redwood (@johnredwood) December 26, 2020

MPs begin voting on the agreement this Wednesday and already some of the most commited Brexit supporters have indicated or otherwise implied that they'll give their seal of approval to it, meaning the parliamentary battles that marred Theresa May's short time in office are unlikely to be repeated. 

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Prime Minister Johnson's agreement runs for more than 1,200 pages in length and has not yet been reviewed in its entirety by Pound Sterling Live, although sections pertaining to key areas of difference or dispute in the talks do offer rewards to both sides for their persistance. Previously, the two sides had been at loggerheads over whether Britain should have to accept the EU's rulebook on state aid, competition and environmental matters as well as on the degree to which British fishing waters and oppportunities would be recovered.

It's in matters related to fishing where British negotiators had the most success. The agreement provides for Britain's share of sustainable fishing opportunities to rise to just less than two thirds by 2026, although arguably of greater importance is a likely hard-won exemption for fish, fish products and the fishing industry from what is otherwise an EU rulebook governing state aid matters.

"This Chapter does not apply to subsidies that are subject to the provisions of Part IV or Annex 2 of the Agreement on Agriculture and subsidies related to trade in fish and fish products," the agreement says of its state aid chapter.

 Above: Pound-to-Euro rate at daily intervals.

The above means the government will be able to provide unlimited subsidy through loan guarantees and grants in support of the development of new and existing ventures in the fishing industry. The fishing industry will be approached in very much the same way as agriculture is in Europe, with fishing exempt just like farming from the onerous constraints of the EU's rulebook on state aid. This wasn't the case previously and is a win for Johnson, Frost and Britain.

"Regulatory measures shall not constitute a disguised barrier to trade...The Parties are determined to maintain and improve their respective high standards in the areas covered," the agreement says of its 'level playing field'.

In relation to other industries, there's no fisheries-like exemption. That means the next time steel jobs in Scunthorpe or elsewhere - not to mention what's left of the nation's strategically important industry - are in danger of disappearing then the government may find itself with both a political as well as economic crisis on its hands. This is a win mostly for the Chinese state, although also for Brussels' negotiators too. The EU's dogmatic rules on state aid, combined with its incompetence if-not negligence on 'trade defence,' have wrought nothing but destruction on the industry in Britain as well as Europe.

Most notably for all however, the agreement contains clauses for termination as well as review which enable it to be revisitied in whole or in part every five years. This makes it both a platform on which Brexiteers could build, as well as a prospective chopping bloc for the whole affair. A real double-edged, democratic sword, which carves out and ensures a permanent place in British politics for Brexit matters rather than any closure of, or decisive end to the saga.

The week ahead is bookended by public holidays so with Brexit aside will likely be a quiet one for currencies and other financial markets, characterised again by reduced trading volumes and potentially also short-lived volatility. There are no major economic numbers due from the UK or Europe.

 Above: Pound-to-Euro rate at weekly intervals.