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Pound Sterling / Euro Rate Rises to a Best at 1.1290 Amidst Turkish Tensions + Hopes for a Brexit Concession

Theresa May and the Pound

Above: Theresa May might just have won a concession from the EU. Image © Crown Copyright

The British Pound rose 0.60% against the Euro on the final day of the week amidst a combination of fading Brexit fears and all-around Euro weakness.

Key to the move is a broad-based slump in the Euro exchange rate complex owing to a surge in uncertainty owing to the currency crisis escalating in Turkey.

The Pound-to-Euro exchange rate is quoted at 1.1176 on the inter-bank markets at the time of writing, having been as low as 1.1073 earlier in the week and as high as 1.1291.

The news will come as a relief for under-pressure foreign exchange buyers: the recovery ensures the best international payments are now being offered above the 1.11 region once more, however we note bank's are still offering in the 1.08-1.0870 region.

Joe Manimbo, a foreign exchange analyst with Western Union says the Euro has been "rattled" by Turkish uncertainties:

"The market is entertaining the notion that economic trouble in Turkey might potentially spread to banks in Europe with exposure to Turkish assets. Reports indicated that the ECB was looking into how exposed banks in France, Italy and Spain are to Turkey. Italian finances are also in focus with markets worried that the nation’s coalition government could soon embark on a debt-fueled spending spree."

 

EU Could be Ready to Offer a Concession, 1.11 Support Holds

Pound Sterling Live reported on Thursday, August 10 that Pound Sterling was due a rebound owing to heavily oversold technical conditions: The RSI was oversold as it was reading below 30, while the support level of 1.11 on the inter-bank markets was always seen as a potential turn-around point.

Pound perks up this Friday

A trigger for a recovery in the GBP/EUR exchange rate - which is widely considered to be the best expression of Brexit risk premium - also came in the form of news that Europe is finally ready to give concessions to the UK in order to keep negotiations moving forward.

The Times reports that European leaders are preparing to negotiate a deal that would let Britain remain in the single market for goods while opting out of free movement of people.

Member states have let it be known that they could abandon one of the bloc’s ideological red lines in return for more Brexit concessions from Theresa May. They expect her to replicate all new EU environmental, social and customs rules in addition to those set out in the Chequers white paper.

The potential trade-off is on the table to be discussed at a special meeting of all 28 leaders in Salzburg next month. The Times say this marks the first significant divergence between the public position stated by Michel Barnier, the EU’s chief Brexit negotiator, and the European Council.

"What fueled the GBP bounce? Talk that the EU could make a concession. Under consideration is to allow UK to remain in common market for goods. In exchange EU may demand UK replicate all environmental, social & customs rules. UK parliament may find it still too much to swallow," says Marc Chandler, a prominent financial market analyst and Wall Street Veteran.

We believe the conditions are now in place for Sterling-Euro to consolidate once more; with the range between the 1.11-1.15 boundaries being a natural nesting ground.

It will take a significant and clear signal that Brexit talks are about to fail for the exchange rate to break lower, and we simply do not have any information on the table at present to suggest this is indeed the case.

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Euro Exchange Rates Feel the Heat on Turkey

The Pound could actually be a little flattered by an underperformance in the broader Euro exchange rate ahead of the weekend.

The Euro exchange rate complex is a notable under-performer in the G10 currency complex on August 10 with markets fretting about potential contagion risks emanating from Turkey.

It looks like the collapsing Turkish Lira is raising concerns for the stability of Eurozone financial assets; and the European Central Bank is taking notice according to reports.

The immediate concern for the ECB is the exposure of European-based banks with an exposure to Turkey; notable names include UniCredit and BNP Paribas. Should these banks see growing stresses there could be notable pass-through effects on Eurozone credit conditions.

"The EUR should be trading with a neutral bias vs the USD in an environment like the current one. Instead, the EUR has been a G10 under-performer today. Why the discrepancy?" asks Stephen Gallo at BMO Capital Markets.

Gallo explains the Eurozone is not intact the unified and steady single market many assume, and "in the context of low bank profitability and the Eurozone’s minimal resilience to shocks, the direct financial exposures of Eurozone banks to Turkey matter more, especially for the EUR."

The Eurostoxx index is down more than 1.5% on the day, led by banks which are down around 2.9% confirming the risks markets perceive the banking sector to be exposed to on the crisis.

The Lira booked a new record low against the Dollar as talks in Washington aimed at working through fresh sanctions failed and markets showed nerves ahead of an impending announcement on a 'new economic model' which hints at more government interference in the economy.

Markets believe that the Turkish issue has reached a magnitude that could well see the ECB refrain from ending its supportive quantitative easing programme at the end of 2018, and this could in turn delay an interest rate rise in late 2019.

It is the assumption that this rate rise is coming that has kept the Euro exchange rate complex relatively supported over recent months.

Turkey is clearly now a 'fly in the ointment' when it comes to assumptions for tighter ECB policy and a stronger Euro.

"EUR/USD has broken below the recent 21 June low of 1.1509 to 1.1446 at the time of writing after the FT reported that the ECB was concerned about the Turkish exposure of some European banks. It looks like EUR/USD will hit our end‑September forecast of 1.1400 early," says Richard Grace, a foreign exchange strategist with Commonwealth Bank Australia.

The single-currency is down half a percent against the Dollar, and even Sterling is taking a good slice of recent losses back with the Euro-to-Pound conversion notching a 0.25% slip to 0.8964, with the exchange rate having been as high 0.9030 this week.

Euro exchange rate underperformance

"GBP stabilised somewhat yesterday and EUR/GBP fell back to just below the 0.90 level. The move lower in EUR/GBP was mainly driven by the downward pressure on EUR/USD though, and we still think it is too early to call for a stabilisation in GBP risk premium," says Jens Peter Sørensen, Chief Analyst with Danske Bank.

The recovery of Sterling ensures the Pound-Euro rate is quoted at 1.1153 on the interbank market, in turn raising the best rates on payments towards the 1.11 threshold and lifting high-street bank transfer rates towards the mid 1.10s.

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