Pound Sterling Drops on Reports Govt. Close to Abandoning Hopes for EU Trade Deal

- Govt. now assuming EU trade deal unlikely
- U.S. trade deal in 2020 also in doubt
- GBP back under selling pressure
- EUR dominates following EU rescue deal agreement

Above: Boris Johnson Cabinet Meeting at the FCO.The Prime Minister Boris Johnson holds his first face-to-face cabinet meeting at the Foreign Office since the Covid-19 Lockdown took place in March. Picture by Andrew Parsons / No 10 Downing Street

The British Pound was once again shedding value against the Euro, U.S. Dollar and other major currencies on Wednesday, with sentiment regarding Brexit souring once more courtesy of a Telegraph report that the Government is abandoning hope for a trade deal with the EU.

The Telegraph reports the Government’s central working assumption is that Britain will trade with Europe on World Trade Organisation terms when the transition period ends on December 31.

Senior sources told the newspaper there was now an assumption that “there won’t be a deal”, though it remains possible that a “basic” agreement could be reached if the EU gives ground in the autumn.

"The probability of a no-deal Brexit has increased significantly. For this reason we are forecasting a weak pound in the short term and only a very moderate recovery later in the year. In fact, there is a high risk that the pound will suffer much more severe setbacks in the meantime than our forecasts suggest due to rising Brexit risks," says Thu Lan Nguyen, FX & EM Analyst at Commerzbank.

The Pound-to-Euro exchange rate has reversed from an attempted recovery and is back below 1.10 at 1.0998. A great portion of the GBP/EUR decline will have its roots in the surging Euro which benefited from a EU agreement to pass a €750BN coronavirus rescue fund on Tuesday, a move which brings the EU closer together in both political and fiscal terms.

"Brexit related uncertainties on top of the shock of the covid-19 lockdowns has mean that the market is reluctant to dismiss the possibility that the BoE could at some point be forced into using negative interest rates," says Jane Foley, Senior FX Strategist at Rabobank.

Secure a retail exchange rate that is between 3-5% stronger than offered by leading banks, learn more.

"Insofar as the UK has a current account deficit, in contrast to the other countries that have used a negative rate, it is possible that GBP could be particularly vulnerable in this scenario. The combination of a no deal Brexit and negative interest rates could push EUR/GBP towards parity," adds Foley.

The Pound-to-Dollar exchange rate has meanwhile fallen back from multi-week highs at just below 1.28 to trade at 1.2673 at the time of writing.

EU and UK negotiators are currently locked in discussions that are due to end on Thursday, and we believe any signs of progress could boost the value of Sterling.

However, given the headlines out today, and the general tone surrounding talks of recent weeks, the chances of a breakthrough are slim and as there are no further negotiations scheduled for this month, the UK's July deadline for the outline of a deal to be agreed will have passed.

To be fair, missing this July deadline was always expected, with the EU's preferred October deadline being a more likely target markets have chosen to eye.

Above: GBP is down against most peers today

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"We wanted to see an agreement this month. It’s clear from the EU side that’s not going to happen," a source told the Telegraph. "No trade deal has to be the working assumption, because that’s what we have to prepare for. But it doesn’t mean it’s what we want or are working to make happen."

Expect levels of anxiety over Brexit to remain elevated over coming weeks, an environment that Sterling traditionally struggles in.

"Under our central scenario, we now expect the UK and the EU to arrive at a ‘bare-bones’ trade deal for goods by end-2020. The GBP is undervalued and oversold, but the weak growth outlook and Brexit uncertainty could keep it close to the lows for most of this year," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The headlines concerning the falling odds of an EU-UK trade deal being agreed come the same day as the FT reports the government's hopes of reaching a US-UK trade deal ahead of this autumn’s American presidential election have been abandoned, with British officials blaming the Covid-19 pandemic for slow progress.

Johnson and international trade secretary Liz Truss had hoped to conclude a fast-track agreement by late summer, which would be hailed as an early win from leaving the European Union.

But senior government figures told the FT they have concluded no comprehensive deal is possible before the November poll as the two sides grapple over contentious issues such as whether to allow US agricultural products into the UK market.

"Is it going to happen this year? Basically, no," one official told the newspaper with another saying, "We don’t want to be bounced into a deal."