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Pound-to-Euro Rate Eyes Fresh Losses ahead of Raab-Barnier Brexit Update

-Pound-to-Euro rate on front foot at start of new week.

-But technical analysts are warning of losses this week.

-Analysis comes as warnings of "no deal Brexit" increase. 

© moofushi, Adobe Stock

The Pound-to-Euro rate entered the new week on the front foot, rising by a fraction against a beleaguered single currency into Tuesday, but analysts are warning that it could come under renewed pressure during the days ahead.

This is because, with the Bank of England having said its part on UK interest rates for the time being, the market's focus has returned to the subject of Brexit just as the negotiations are entering a crucial stage. 

The number of government ministers making pronouncements on the perceived dangers of a "no deal Brexit" has risen sharply during recent weeks. 

Now, with negotiators from the UK and EU set to update the market on Tuesday, there is scope for more warnings of about the supposedly-rising possibility of such an exit to further dent the Pound this week.

"EUR/GBP is heading back up towards the .9000 region," says Karen Jones, head of technical analysis at Commerzbank, referring to the inverse of the Pound-to-Euro rate. "Last week EUR/GBP reached the .9014/34 October and November 2017 highs before rapidly falling to the three month support line at .8907, only to then bounce off it and head back up towards the .9000 mark. Above it lies the current August high at .9031."

The Pound-to-Euro rate traded 0.19% higher at 1.1168 Tuesday although Jones says it could fall as far as 1.1072 over coming days. The Pound-to-Euro rate fell from 1.1185 to 1.0746 between the end of July and end of August 2017.

Above: EUR/GBP rate shown at daily intervals.

The EU has always insisted there can be no "hard border" for the sake of peace in Northern Ireland. But it also says there would have to be one if the UK leaves its single market and customs union as, in a post-Brexit world, the UK would operate different trade tariff regimes with different countries to the EU.

This was the impetus for PM May's "Chequers Deal" proposal for the future relationship that means effective single market and customs union membership for all of the UK's goods trade, alongside a "mobility of labour" agreement that has been criticised as code for the continued free movement of labour.

The so called "backstop" proposals for trade arrangements should UK and EU officials fail to agree a solution to the Irish border problem would ultimately see all of the UK remain inside the single market and customs union until a deal that is palatable to Brussels can be struck.

Short of a deal, this would be the only option available to the PM unless she were willing to allow the Northern Irish province to be annexed from the rest of the UK and absorbed into the EU's legislative and regulatory orbit after Brexit.  

Many expect Prime Minister Theresa May will have to make further concessions to the EU before Brussels becomes willing to declare itself satisfied with the withdrawal negotiations. Such concessions would merely add to existing domestic political pressures given the spate of government resignations sparked by the PM's "Chequers Plan".

Above: Pound-to-Euro rate shown at daily intervals.

"Sterling has continued to weaken despite the Bank of England (BoE) rate hike on 2 August. With little time to go until March 2019, market focus is now shifting to that ominous Brexit deadline," says Daniel Trum, a strategist at the chief investment office of UBS Global Wealth Management. "We still believe it is more likely than not that a deal will be eventually found, so that EURGBP can fall to 0.88 in six to 12 months. However, for the next three months, we expect EURGBP to rise to 0.90 and slightly above." 

If the "withdrawal agreement" is not ratified in all parliaments across the EU before March 29, 2019 then the UK will leave the EU without any formal exit or trade arrangements at all, and default to trading with the bloc on World Trade Organization terms. 

This is how the nation currently does business with the US, which is the UK's largest single export market, as well as China and most other emerging world economies. However, predictions of what it might mean for the economy have ranged from the plausible to the downright bizarre. Most generally agree that there will be at least some negative impact on growth in the short term.

 

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