- GBP/EUR supported at 1.11.
- Key week for Brexit negotiations.
- GBP/EUR could rallly to between 1.14 & 1.15 on a deal, analysts say.
Image courtesy of Aurelien Guichard, accessed Flickr, reproduced under Creative Commons licensing conditions.
- GBP/EUR spot rate at time of publication: 1.1160
- Bank transfer rate (indicative guide): 1.0813-1.0890
- FX specialist providers (indicative guide): 1.0940-1.1011
- More information on FX specialist rates here
The Pound-to-Euro exchange rate is firmer at the start of the new week, having fallen to a November in the previous week as Sterling underperformed in the absence of progress in the Brexit negotiations.
The currency could see a pick-up in the coming days as the EU and UK edge toward a deal, which would give the Pound a clear path back to April and May highs, at least.
Pound Sterling was the second-worst performing major currency last week having trailed major counterparts, with the exception of the Japanese Yen, as upbeat investor sentiment aided other currencies, while the British unit was penalised for ongoing differences in the Brexit negotiations.
The coming days could be decisive for the outcome of those talks as well as the trajectory of Pound Sterling into year-end and beyond.
Axel Rudolph, a senior analyst at Commerzbank says the GBP/EUR exchange rate is capped below 1.1280/1.1281, the June and September highs. "We look for this to hold."
Rudolph was a seller of the Pound-to-Euro rate but exited the position at 1.1111 on Friday, which is tipped to offer Sterling strong support this week.
He and the Commerzbank team say the Pound will struggle to get sustainably past the June and September highs near to 1.13 and that over a one-to-three month horizon it's vulnerable to a slide all the way back to 1.0725.
Above: Pound Sterling's performance against major rivals in five years to Nov 2020. Source: Pound Sterling Live.
Whether or not Sterling continues to probe higher or about-turns and capitulates lower this week depends substantially on the market's reading of the latest developments in the Brexit negotiations, which could be edging toward at least a temporary resolution after more than four years of acrimony.
"Important differences" were still keeping the two sides from an agreement on Friday.
These were said by Foreign Minister Dominic Raab in an interview with Sky News on Sunday to now mainly revolve around fisheries access.
"The levels at which GBP is trading is still tell us that very little of the worst-case scenario is being priced in. Accordingly, should negotiations definitively collapse, the downside reaction should still be asymmetrical," says Petr Krpata, chief EMEA strategist for currencies and bonds at ING. "Time is indeed running very short and we should at least see the balance tilt towards one of the two outcomes more decisively this coming week. We remain in the view that a deal (although a “skinny” one, mostly focused on trade rather than services) will be agreed, so we retain a positive bias on GBP."
GBP/EUR Forecasts 2021
Period: Full Year 2021
FX for Businesses Guide
European demands for so-called level playing field terms around state aid, environmental regulation and taxes as well as other non-environmental taxes have been key roadblocks in the talks until recently.
But it's fisheries that have been the subject of most recent remarks from Downing Street and Michel Barnier has reportedly called a meeting between EU envoys on fisheries for Monday.
This was after European Commission chief Ursula von der Leyen said on Wednesday that "genuine progress" had been achieved but that "in the discussions about state aid, we still have serious issues, for instance when it comes to enforcement."
"There is scope for a relief rally in GBP on news that a deal has been signed, though the failure of the UK and EU to agree a comprehensive deal will likely limit upside potential," says Jane Foley, a senior FX strategist at Rabobank, who sees EUR/GBP falling to 0.87 and the Pound-to-Euro rate rising to 1.1494 following any deal.
"EUR/GBP is currently not trading far above the November low around 0.8861. This area provided decent support both in June and in September, indicating that a break lower could pave the way for a move towards the 0.87 area. That said, GBP still has a lot of hurdles to clear before investor confidence can increase," says Foley.
A cynical reading of recent events would suggest all that remains to be agreed are the terms of a somewhat contrived British victory in the spat over fishing, which subsequently enables Prime Minister Boris Johnson to claim a form of win that may or may not make selling the new treaty to his parliamentary party a less arduos task. Such agreement could be announced in the coming days.
Above: GBP/EUR at daily intervals with Fibonacci retracements of 2020 fall acting as resistance, select moving-averages.
The two sides have less than a fortnight until the Thursday 11 December and the European Council meeting of 2020 that's thought to mark the last opportunity to have any agreement signed off in time for it to be ratified by year-end. Without one, both will default to doing business with each other on World Trade Organization (WTO) terms from January 01, 2021, which would entail the reintroduction of tariffs on imports from the other side, in addition to the other non-tariff barriers that may materialise with or without a deal.
"Our economists continue to expect a "thin" free trade deal given the progress so far and the approaching deadlines that will present stark alternatives for those on all sides of the issues. Taken together with the UK’s strong position for vaccine distribution leaves us optimistic on further Sterling appreciation (we still target 0.87 on EUR/GBP), though the next few weeks will likely be a bumpy ride," says Zach Pandl, global co-head of foreign exchange strategy at Goldman Sachs, who also forecasts a GBP/EUR test of 1.15 following any agreement.
With the Brexit negotiations aside, there is little for the Pound to take its lead from beyond the ebb and flow of investor sentiment.
This is likely to remain upbeat following the weekend revelation from the FT that millions of doses of the Pfizer and BioNTech coronavirus vaccine could be available in the UK by December 07.
A succesful and widely available vaccine could reduce the government's compulsion to keep vast parts of the economy under lock and key, allowing for an economic rebound that would ultimately benefit the Pound.
Above: Pound-to-Euro rate shown at weekly intervals alongside selected moving-averages.