Euro-Dollar Tipped Lower at Societe Generale as 'No Deal' Brexit Probability Estimated at 80%

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• EUR/USD spot rate at time of writing: 1.1796
• Bank transfer rate (indicative guide): 1.1386-1.1469
• FX specialist providers (indicative guide): 1.1622-1.1693
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The Euro-Dollar rate set a new September low Thursday amid a tentative rebound in the greenback, although it's been tipped for further declines by Societe Generale as the rising probability of a ‘no deal’ Brexit threatens to challenge a favourable transatlantic growth outlook. 

Euros were sold alongside other major currencies as the Dollar was lifted by disappointment over a lack of Federal Reserve policy action, although the deteriorated Brexit situation could be as important a factor in the single currency’s outlook as anything else in the weeks ahead. 

"A ‘no deal' exit is now an 80% probability. Crashing out could result in a 3% hit to UK GDP, half of that coming in 2021 and about 25% as much of that in the EU. Another reason to think the market is a bit over-enthusiastic about Europe's growth rate catching up with the US,” says Kit Juckes, chief FX strategist at Societe Generale. "I still like yen longs, with GBP/JPY our favourite cross." 

The British government has bungled itself into another bind this month which is bad news for the Pound first and foremost, but also the Euro too. 

It's still unclear if the Internal Market Bill was or wasn’t a fit of rabble rousing intended only for domestic consumption, or a serious expression of intent, although one way or the other Downing Street has made an acrimonious exit from the Brexit transition period a lot more likely this September. 

Above: Euro-to-Dollar rate shown at 15-minute intervals.

If the government was serious about cancelling equally controversial parts of the EU Withdrawal Agreement treaty then absent an unlikely European capitulation on all of its core demands in the Brexit trade talks, a ‘no deal’ exit from under the bloc’s umbrella might be assured for December 31. 

And if the Internal Market Bill was a hapless attempt at rallying supporters, the government has also worked itself into a bind, with the EU’s position that the offending lines be removed for compliance with its interpretation of the agreement to be restored requiring an all out u-turn. This might only serve to bolster perceptions of government incompetence.

“This mess may indeed be as bad as 1976, but this time, we can't rely on the IMF to force a change in policy,” Juckes says in a research note. 

The UK government’s popularity is being tested by its response to a second wave of coronavirus that has collapsed the supposedly ‘world beating’ testing and tracing programme, panicking officialdom in the process and leading to new restrictions on activity that have drawn widespread criticism. 

Under these circumstances, a ‘no deal’ Brexit might be welcomed by government as a distraction especially if supporters can be encouraged to rally around the flag, which is not good news for Sterling or the Euro. 

Above: Euro-to-Dollar rate shown at daily intervals alongside EUR/GBP rate (orange line, left axis). 

Meanwhile, the softening of stance in parliament only goes as far as offering MPs a vote before the offending powers are used if the bill becomes law. It doesn't touch the terms the EU says are a breach of the treaty. 

“The correction has further to go. It has taken EUR/USD back to the bottom of its recent range and I'm still holding out for 1.15 or so,” Juckes says. “We'll put a fresh set of G10FX forecasts together but where we had looked for EUR/GBP at 0.93 in a year's time, we now expect 0.96, the highest level since 5 Jan 2009 and inches way from a new all-time low for the real effective exchange rate."  

Europe’s single currency has not been able to reclaim September 01 highs since the European Central Bank (ECB) became vocal about the trade-weighted Euro and extent to which it’s risen during recent months, and Pound Sterling began acting like ball and chains around the ankles of the Euro-to-Dollar rate.

Sterling accounts for more than 15% of the trade-weighted index and is widely expected to fall at least near to parity following a ‘no deal’ Brexit. This would provide a powerful uplift to the Eurozone's effective exchange rate,  and potentially enough so to demand an offsetting adjustment elsewhere. Somewhere like the Euro-to-Dollar rate.