The Pound has retreated from its 2020 highs against the Euro, falling from 1.2074 on Tuesday back to the mid 1.19’s this morning.
The decline comes during ongoing concerns that the UK and EU are moving further apart on the matter of trade, with both sides looking to draw a line in the sand ahead of any official talks which are due to start in March.
Analysts at Danske Bank have said “We do not think the renewed optimism will last long, as Brexit uncertainty remains high, in our view. At this point, we cannot rule out a no deal Brexit by the end of the year if the EU and the UK cannot strike a permanent trade agreement,” They believe the GBP/EUR exchange rates will endure a notable dip over the course of the next six months due to fractious trade negotiations.
Since August last year the Pound has appreciated 10% against the Euro when markets assessment of Brexit shifted and expectations for a no-deal outcome dropped substantially. The Pound then continued to gain against the Euro after the Conservatives won the December elections, which in turn removed significant amounts of political uncertainty that held investment back. The move above 1.19 has been sustained by a series of better than expected economic data which confirmed the UK economy remains robust, at the same time data out of the Eurozone continued to disappoint.
What pushed rates above 1.20?
The Pound February rally stepped up a gear last week on the announcement that Chancellor of the Exchequer Sajid Javid was stepping down to be replaced by Rishi Sunak, a move interpreted by markets as confirmation that the Prime Minister is looking to have a greater say on the scale of any increase in spending, pushing GBP/EUR into the mid 1.20’s. A sizeable increase in spending could buoy economic activity and in turn further aid the Pounds rally back into the 1.20’s. However, should Sunak opt to run a modest increase in spending as was expected of his predecessor, markets might be disappointed and sell Sterling in response.
For now, I think The Pound has topped out and will struggle to breach the 1.21 mark whilst a real chance of a no deal Brexit still looms overhead. If the first round of trade talks does not yield any positive moves forward, we could see GBP/EUR rates back into the 1.17’s with the possibility of it falling lower if the UK cannot strike a permanent trade agreement with the EU.