GBP/EUR Coaxed Back Above 1.10 for International Payments

Above: Chief Brexit negotiators Dominic Raab and Michel Barnier. Image © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Lukasz Kobus

- Easing Brexit fears allows for recovery in key Sterling-Euro exchange rate

- Retail rate for international payments coaxed back above 1.10

- But gains might be short-lived argue analysts

A sudden mid-week surge in the value of Sterling relative to the Euro offers a rare piece of respite for UK businesses and individuals with international payment commitments as the retail rate nudes above the psychologically important 1.10 level.

The spot inter-bank market mid-price leapt above the 1.11 marker for the first time in days - taking the retail price firmly back above 1.10 - in the wake of a trifecta of positive Brexit developments:

1) EU negotiator Michel Barnier says the EU is preparing to offer a partnership with Britain such has never been with any third country

2) UK negotiator Dominic Raab says talks are 80% complete, and

3) both sides have agreed to push the deadline back into November from the initial October European Council summit deadline.

All the above suggests to markets that there is now more time and willingness from both parties to avoid a 'no deal' Brexit scenario.

The British Pound is, at the time of writing, the best performing major currency of the past week thanks to a bout of relief buying stemming from fading fears that the UK and EU are headed for a 'no deal' Brexit.

A 2.08% advance against Japan's Yen and a 1.73% advance against the Dollar are the stand-out moves.

However, a shaky 0.28% advance against the Euro confirms there is more work to be done against the single-currency. The performance against the single-currency is instructive as it is widely seen to be the best marker for Sterling's performance relating to Brexit sentiment.

The jump in value of the British Pound nevertheless comes in line with our predictions for such a recovery made on Wednesday morning, hours before all the Brexit-related news broke.

We observed that the Pound-to-Euro exchange rate was oversold and rarely goes more than four days in row without making a gain.

Analyst Trevor Charsley with foreign exchange brokers AFEX added to our confidence saying he saw the potential for a temporary turnaround at the 1.10 level where a barrage of buy orders were nesting.

Above: Despite recent improvements for Sterling, medium-term trends still advocate for more weakness. Sterling needs to put in more work before a bottom can be called. Image © TradingView, Pound Sterling Live.

The recent decline in the spot exchange rate below 1.10 appears to have coaxed more participants into the market who liked the discount Sterling was offering, allowing for a technical recovery to form.

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Better Exchange Rates for the Retail Market

The British Pound's rally has meanwhile pulled the broader retail market higher.

Retail supply of Euros from banks and brokers is typically offered at lower rates than the interbank market owing to a margin attached by providers from which they derive profit.

High-street banks are now seen offering the GBP/EUR in a 1.0738-1.0815 bracket while independent providers are offering tighter spreads and supplying in the 1.1027-1.1071 bracket.

Can further advances be expected, or is this as good as it gets?

Jens Peter Sørensen at Danske Bank is sceptical on the ability of the current move to extend too far warning, "the political risk premium on the GBP is likely to remain high in the coming weeks and given the current softness in the USD, it too early to call the top in EUR/GBP yet, in our view."

"Political news related to Brexit is likely to remain a key source of volatility and directional for the GBP near term," adds the analyst.

Following Sterling's jump, Joshua Mahony, Market Analyst at IG, warns that the market could be getting a little too far ahead of itself.

"Unfortunately, while we are seeing some significant improvement in market sentiment after this announcement, there is feeling that we have seen this all before. Almost all the preceding ‘breakthroughs’ have been swiftly proven to be a false dawn, and thus while we are seeing the pound spike higher, there is certain to be some hesitancy until we see a more consistently positive tone from the EU," says Mahony in a briefing following the Barnier comments.

It appears Sterling sellers are indeed set for a period of relief, but the warnings we are hearing from market specialists is that this situation might not persist.

Looking ahead, the next major test for the Pound comes on Friday as Dominic Raab and Michel Barnier are to meet in Brussels.

A briefing is expected in which the two principles are expected to update on recent progress ensuring markets could be in for further excitement ahead of the weekend.

Expats told to Prepare

An estimated 1.8 million British expats living in the EU should consider reviewing their personal financial strategies as ‘no-deal’ Brexit looks increasingly likely according to one of the world’s largest independent financial advisory organisation.

deVere Group say a 'no deal' Brexit is now expected by a growing number of experts and the wider population to be the most likely outcome.

The warning from deVere Group comes after British Prime Minister Theresa May claimed that a no-deal Brexit “wouldn’t be the end of the world” and the publishing by the UK government last week of its first technical notices advising businesses and consumers on the preparations being done for the prospect of there being 'no  deal' Brexit.

According to de Vere, if the UK crashes out of Europe with no deal in place, the estimated 1.8 million expats living in the EU could be financially impacted in two key ways:

First, the pound would inevitably suffer and it could fall hard.

"This would deliver another heavy and serious blow for those who receive UK pensions or income in pounds as the cost of living, in effect, would be significantly more expensive," says James Green, deVere Group’s divisional manager of Western Europe.

Secondly, "unless there is considerable post-Brexit collaboration between the UK and EU there is a risk that existing payments from British companies, including pension and insurance companies, to those living within the European Economic Area (EEA) could be disrupted or even made impossible. Of course, this would be a major inconvenience to many UK expats," says Green.

The advice from Green is for expats to ensure they have considered putting in place a financial 'strategy' to protect against downside risks.

“Against this chaotic backdrop it is prudent that British expats in the EU consider reviewing their personal financial strategies sooner rather than later with a cross-border financial expert. This will help best position them not only to mitigate the risks of a no-deal Brexit, but also to enable them to take advantage of potential opportunities that may arise.”

The warnings do however come in the wake of a notable bounce in Sterling relative to the Euro following a number of positive developments regarding Brexit negotiations.

The British Pound has surged higher against a host of major currencies mid-week following comments from chief EU Brexit negotiator Michel Barnier that "the EU is preparing to offer a partnership with Britain such has never been with any third country."

The comments were made alongside Germany's foreign minister Heiko Maas and will go some way to calm market fears that the EU and UK are headed for a 'no deal' Brexit scenario.

"That kind of bullishness has been in short supply of late – if it has ever been there at all – and had a hugely rejuvenating effect on the Pound," says Connor Campbell, market analyst with Spreadex.

But, Green is not so optimistic and argues, “unfortunately, a smooth and orderly exit of the EU is looking increasingly unlikely and this can be expected to hit the finances of many expats. They should seek to make their financial strategies ‘no deal Brexit’ proof.”