GBP/EUR Dips as Brexit Fears Pressure Sterling

Alan Penny

4 February 2020

4 min read

Brexit puzzle pieces

  • Sterling continues to be sensitive to Brexit
  • The UK and EU are already disagreeing over terms
  • Eurozone outperforms but the data isn’t enough to strengthen the euro

Last week, the pound experienced some gains. This was on the back of the BoE maintaining rates and a hopeful outlook of the British economy’s future. However, this week has seen the GBP/EUR dip, proving the pound is still highly affected by the Brexit situation.

this week has seen the GBP/EUR dip, proving the pound is still highly affected by the Brexit situation

While on January 31, many celebrated the UK’s departure from the EU, just as many were not pleased. It seemed, though, that the optimists were driving the market. This didn’t last, though, as concerns over the negotiations flared up.

In part, Brexit fears were fanned by statements from UK PM Johnson and Michel Barnier, the EU Chief Trade Negotiator. It became clear that the two parties’ goals are practically diametrically opposed. This weakened investor confidence in the pound.

At the beginning of last week, the GBP/EUR was trading at 1.1856 and continued to trend downwards. However, after the BoE announcement, the GBP/EUR rose to trade at 1.1902. Today, the GBP/EUR dipped to 1.1713, forming a new two-week low.

UK and EU views of the future don’t align

UK Prime Minister Boris Johnson dashed any hopes of smooth negotiations between the EU and the UK. In a speech in Greenwich, he made it clear his preference was for a trade deal akin to that of Canada’s with the EU.

Otherwise, he’d be more willing to accept an Australian-style deal than align with EU regulations or European court oversight.

Canada’s deal with the EU involves eliminating limited quotas and 99% of tariffs, without alignment to EU regulations. Australia, however, mainly deals with the EU in accordance with WTO rules.

In other words, PM Johnson essentially said he’d rather walk away with no deal than to comply with EU rules.

The EU, on the other hand, wants the UK to align with rules in the EU regarding a number of issues. These include the environment, taxation, state aid, and social and labor policies.

Brussels claims that they don’t want the British government to start subsidizing parts of the economy. Aerospace, steel, and the automotive industry were some examples.

The UK isn’t willing to bend, though Johnson said the standards won’t necessarily be looser. He pointed out that the UK hasn’t needed state aid as frequently as other EU member states.

Michael Barnier said that EU demands shouldn’t come as a surprise to the British. In the political declaration’s text, he said, “Boris Johnson and we … both say that we are keen to avoid any distortion of competition and any unfair competitive advantages.”

Johnson responded by saying that conditioning a free trade agreement with acceptance of EU rules isn’t right. After all, it would be akin to obligating the EU to abide by UK rules.

Other points of contention including fishing rights, judicial oversight, and the Irish border. Negotiations are set to begin in March and must close by October.

Eurozone positive data unable to buoy the common currency

While the GBP/EUR dipped, the euro experienced less significant gains versus the weak sterling than other major currencies. The limited demand for the euro occurred despite relatively positive data out of the Eurozone.

One reason for the relatively weak euro was that the US dollar strengthened. A common pattern with the two currencies is that when the USD strengthens, the EUR weakens, and vice versa.

if Brexit concerns don’t escalate, the sterling could stabilize

Yesterday saw concerns over the coronavirus abate somewhat, leading to a stronger USD, as well as other important currencies. However, due to the negative correlation, it led to a decline in the EUR. This is despite manufacturing PMIs out of the Eurozone outperforming.

In the near-term, if Brexit concerns don’t escalate, the sterling could stabilize. Thus, investors would focus more on data. On Wednesday, the UK will publish key economic figures. If performance is on par or exceeds expectations, the sterling could see some gains.

Written By
Alan Penny

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