Market Slump Prompts fall in Sterling, Markets Await Johnson-von der Leyen Meeting

- GBP down against EUR and USD
- GBP up against Australian and New Zealand Dollars
- GBP softer on fresh market slump
- Eyes on high level EU-UK trade negotiation meeting

Above: Ursula von der Leyen Photographer: Etienne Ansotte © European Union, 2020 Source: EC - Audiovisual Service

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The British Pound starts the new week softer against the Euro and U.S. Dollar as global investor sentiment maintains a grip on foreign exchange direction and markets await the outcome of a high-level meeting between UK Prime Minister Boris Johnson and European Commission President Ursula von der Leyen on the status of Brexit trade negotiations.

The meeting by Johnson, von der Leyen, EU Council President Michel and President Sassoli will take place by video conference on the afternoon of Monday 15 June.

Johnson will tell EU leaders that Brexit talks must be concluded by autumn at the latest.

"The main event today is UK PM Boris Johnson meeting European Commission President Ursula von der Leyen and European Council President Charles Michel to discuss the way forward in Brexit negotiations ahead of the 1 July deadline. We are sceptical that the two sides will find a breakthrough in the deadlocked negotiations especially on a possible extension of the transition period," says Lars Sparresø Merklin, Senior Analyst, FX Strategy at Danske Bank.

The meeting comes after the UK and the EU last week agreed an intensify negotiations, setting out a new timetable for negotiations in July.

This new process will involve a mix of formal negotiating rounds and smaller group meetings, both in London and Brussels assuming public health guidelines enable this.

There will be talks each week of the 5 weeks between the week commencing 29 June and week commencing 27 July.

"We are of the view that unless some positive news emerges from the Brexit talks soon that EUR/GBP could push towards the 0.91 area on a 1 month view," says Jane Foley, Senior FX Strategist at Rabobank. EUR/GBP at 0.91 gives a GBP/EUR exchange rate of 1.0990.

Above: GBP/EUR chart showing performance this June

The meeting of von Der Leyen and Johnson comes just days ahead of a June 19 European Council meeting where the EU's leaders will meet over video to discuss key issues, one of which is expected to be Brexit trade negotiations.

While the meeting's verdict on the state of negotiations could be important for Sterling, it no longer has the 'threat factor' that it once did. Back in May Sterling was sold off as markets saw this June meeting of EU leaders as being a 'make or break' moment for Brexit talks, however the EU Council's agenda for the meeting now fails to even make mention of the negotiations.

Instead EU leaders are looking to discuss the EU recovery fund that was set up to respond to the COVID-19 crisis, as well as the new EU long term budget.

The apparent lack of importance attached to trade negotiations at this point is understandable given 1) the huge issues the EU is facing in the form of the coronavirus and 2) the fact that there remain many rounds of talks ahead.

We therefore would expect Sterling to be less sensitive to Friday's meeting than was once the expectation.

Ahead of the Johnson-von der Leyen meeting we note Sterling to be trading under pressure against the Euro and U.S. Dollar but higher against the Australian Dollar and New Zealand Dollar.

The Pound-to-Dollar exchange rate is half a percent down at 1.2471, the Pound-to-Euro exchange rate is 0.40% lower at 1.1097 while the Pound-to-Australian Dollar exchange rate is half a percent higher at 1.8354. The Pound-to-New Zealand Dollar rate is 0.24% higher at 1.9492.

Above: GBP/USD daily chart

This state of affairs in the Sterling exchange rate complex confirms that global risk trends are once again in control of markets, with currencies reacting to another notable sell-off in stock markets as investor nerves are put on display once more.

"U.S. equity futures are down some 1-1.5% and commodity currencies such as the Australian dollar and NOK are down some 0.5%, thus continuing the downward trend as of last week. Similar moves are seen in commodity prices. Several US states continue to report a pick-up in coronavirus cases and this is likely the main reason why markets are opening this week with heightened risk aversion," says Merklin.

The U.S. is seeing a rise in cases in a number of states, with Alabama, Florida and South Carolina reporting a record number of new cases for the third day in a row on Saturday.

Health officials are partly attributing the spike in cases to gatherings over the Memorial Day holiday weekend in late May.

Oklahoma also reported record new cases for the second day in a row, as well as Alaska for the first time in weeks.

"In our view, the bar for turning to lockdowns again seems very high, though. Not least in the U.S., where there is strong opposition to this," says Merklin. He however adds that "if this driver continues to be at the forefront of markets’ attention, we may likely see further retracement of the recent month’s positive risk sentiment and e.g. a stronger broad USD."

But it is not just the U.S. where a spike in cases is proving to be a concern for investors.

India's capital New Delhi is reported to be struggling to ramp up its health care capacity as it seeks to cope with an onslaught of new coronavirus cases, after the easing of restriction on movement and commerce in recent weeks.

The Delhi territory, which includes the New Delhi capital area, is now reportedly wrestling with a severe shortage of beds, and India’s social media has been replete with harrowing tales of families running from hospital to hospital attempting to find care for seriously ailing patients,

Beijing has meanwhile reported an upsurge in cases with half of Beijing’s reporting new coronavirus cases as a mass testing effort brought total cases to 79 in China’s most serious upsurge in the virus in months.

By Monday morning, authorities said many of the city’s central districts had discovered cases after about 76,500 people were tested the day before.

Media reported last week that a cluster of new covid-19 cases have been linked to Beijing’s largest seafood and vegetable market, with the outbreak amounting to the most serious resurgence of the disease in the country.

The Pound remains heavily influenced by the broader picture concerning stock markets and commodity prices, therefore should further anxieties over covid-19 emerge we would expect the UK currency to experience further declines in value.