Pound Sterling Holds Key Levels against Euro and Dollar as Markets see Through Brexit Theatrics

- GBP steady at start of new week
- Markets yet to be concerned by Brexit trade talk developments
- GBP forecast to go weaker over coming weeks as tensions rise

Above: EU Chief Negotiator briefs the press following the conclusion of the 7th round of EU-UK trade negotiations. Photographer: Dati Bendo, European Union, 2020, Source: EC - Audiovisual Service.

• GBP/EUR spot: 1.1088 | GBP/USD spot: 1.3100
• GBP/EUR bank rates: 1.0880 | GBP/USD bank rates: 1.2833
• GBP/EUR specialist rates: 1.0988 | GBP/USD specialist rates: 1.2982
  Learn more about market beating exchange rates, here

The British Pound starts the new week at familiar levels against the Euro and Dollar with Friday's sell-off in the wake of the latest round of Brexit trade negotiations appearing to have been relatively short-lived, suggesting foreign exchange markets retain a cautious optimism that the EU and UK will ultimately strike a deal in the autumn.

The Pound-to-Euro exchange rate is quoted at 1.11 at the time of writing, a significant level around which the exchange rate has tended to oscillate around over recent weeks. The Pound-to-Dollar exchange rate is meanwhile at 1.31, which remains a psychologically significant technical level.

The Pound went higher on Friday in the wake of retail sales and flash PMI data that showed the UK economic recovery had stepped up in August, however the gains were ultimately blunted by updates released by the EU and UK following the conclusion of the 7th round of EU-UK trade negotiations.

Following the conclusion of talks, EU Chief Negotiator Michel Barnier said "I'm disappointed, concerned and surprised."

UK Chief Negotiator David Frost said the EU is being "unnecessarily difficult".

"The GBP underperformed after EU chief negotiator Barnier said a Brexit deal was “unlikely”, raising the prospect of a ‘hard Brexit’ at the end of the year. The UK’s negotiator Frost echoed those sentiments, blaming the EU for the “little progress” made to date. The EU wants an agreement by mid-October, so it can be ratified by national parliaments in time. In the past, EU deals have often taken place at the last minute and there is a chance that negotiations could be extended beyond October, given the potentially huge economic implications from a hard Brexit," says Nick Smyth, Economist at BNZ Bank.

🇪🇺🇬🇧

We are worried about the state of play of the negotiations with #UK. We do not see how we can have a better agreement if we leave the most difficult subjects to the end. We risk running out of time.

My remarks after this week’s negotiations: https://t.co/emQJgP1ps6 pic.twitter.com/vyJ2nsWRsh

— Michel Barnier (@MichelBarnier) August 21, 2020

While some technical progress had been achieved by negotiators, the main sticking points remain unresolved and we feel this will remain the case until leaders from both sides meet and therefore are not surprised by the outcome.

Bruno Waterfield, Brussels Correspondent for The Times, says it is important to note Friday's "theatrics are all process. On level playing field, EU is waiting for UK subsidy policy paper (due next month). Both sides closing in on governance (now the real key to unlock a deal)".

Waterfield says fishing quotas will be done at the "leader level", i.e. presumably at the October summit of EU leaders where many are expecting a final deal to be delivered. "Having said all that, the Brussels barometer dial is very much more set to pessimism than before the summer," adds Waterfield.

"UK and EU officials acknowledged scant progress in trade talks last week, keeping alive the risk of an economy-damaging no-deal split when the transition period expires at the end of the year," Joe Manimbo, Senior FX Analyst at Western Union.

"The latest UK political developments have little to offer sterling. The latest round of talks on a trade deal between the UK and the EU have drawn to a close with no breakthrough agreement in sight," says Jane Foley, Senior FX Strategist at Rabobank.

Foley says GBP/EUR is likely to be pushed lower in the weeks ahead, "unless this status quo alters". Rabobank sees a risk of a move to 1.0870 in GBP/EUR on a 2 to 3 month view "if a compromise on trade with the EU remains elusive".

While foreign exchange markets are suggesting a 'no deal' is not the base-case assumption, expect underlying risks of such an outcome to keep rallies in Sterling ultimately contained; indeed any strength in GBP/EUR and GBP/USD would likely be due to moves in either the Euro and U.S. Dollar.

Even with the UK economic recovery seemingly accelerating, the Pound's true potential won't be realised until the political risk premium surrounding a post-Brexit trade relationship is erased.

For now markets remain 'odds on' that a deal will be reached, which should provide some downside protection for Sterling and therefore limit weakness.

"We should note that Barnier as the EU mouthpiece will always be pessimistic right up to the moment a deal is done. Nevertheless, on certain fundamental principles it looks as though the chasm is too great to bridge. Grappling with the competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. This is where I start to become concerned about a big, comprehensive deal being done," says Neil Wilson, Chief Market Analyst at Markets.com.

Negotiations between the EU and UK recommence in September and the Pound is ultimately likely to maintain recent ranges against its two major counterparts over coming days, particularly as the UK's domestic economic calendar is empty.

Look for GBP/EUR to maintain its oscillations around 1.11 and look for GBP/USD to roughly occupy 1.30-1.32 in the absence of any major U.S. Dollar move. (If you would like to book in an exchange rate around current levels for use at a future date to protect your international payments budget, or would like to automatically book a higher or lower rate should it be achieved, we would suggest investigating the tools at your disposal.)

"Brexit seems to be no longer much of an issue for the FX market. The risk reversals have been moving up recently, and in any event they show no big lurch around the five- and six-month area, which would cover the end of the year, when Britain is likely to crash out of the EU without a trade agreement. Perhaps that’s already in the price? Or is assumed that PM Boris “The Big Umbrella” Johnson will fold, as he did before?" says Marshall Gittler, Head of Investment Research at BDSwiss Group.