British Pound to Remain Soft vs. Euro and Dollar as Trade Negotiations See Rocky Start

- UK deliver initial response to EU trade deal stance
- Risk of early bust-up in negotiations
- GBP rally fails to convince

David Frost trade negotiations

File Image of the UK's chief trade negotiator, David Frost. Image ©, 10 Downing St

- Spot rates at time of writing: GBP/EUR: 1.0808, -1.75% | GBP/USD: 1.1852, -2.15%
- Bank transfer rates (indicative): GBP/EUR: 1.0520-1.0596 | GBP/USD: 1.1537-1.1620
- Specialist money transfer rates (indicative): GBP/EUR 1.0650-1.0701 | GBP/USD: 1.1650-1.1745 >> More details

The British Pound remains well below its 2020 highs against both the Euro and U.S. Dollar with foreign exchange markets unwilling to push the currency higher amidst the global coronavirus market selloff and with just days to go until trade negotiations between the EU and UK officially start.

Trade negotiation headlines are increasingly becoming a focus for the Pound and on Wednesday we hear the UK Prime Minister's office has given a robust rebuttal to the European Union's trade deal negotiation mandate, suggesting the talks could start on a rocky footing.

EU nations on Tuesday agreed a unified position on what a future trade deal should achieve and released a document that would serve as a mandate for their Chief Negotiator Michel Barnier. The EU released a document that offers the markets their first substantive insight into how the EU will approach negotiations and offers clues at where potential tensions might be found.

Our initial take on the matter was that the EU's position was sufficiently short on detail to trigger concerns that it risked being a non-starter for the UK.

On balance, we saw it as being supportive of current Sterling valuations and were not surprised that the British Pound was trading higher on the day against the Euro, Dollar and other major currencies.

The Pound-to-Euro exchange rate has this week recovered from recent lows towards 1.19 to trade back at 1.1950, while the Pound-to-Dollar exchange rate has recovered back to 1.30, having been sub-1.29 on Monday.

However, subsequent press briefings from the office of Prime Minister Johnson suggest caution is warranted as it appears the UK will be on the offensive from early on.

According to The Sun's Tom Newton Dunn, Number 10 Downing Street "wholly rejects the two most contentious chunks of the EU’s trade deal mandate - for a Level Playing Field that follows Union standards, and to maintain EU fishermen’s current fishing access to UK waters."

"Monday’s first negotiation meeting could be a short one," says Dunn. The first round of UK-EU talks to start in Brussels on Monday afternoon, ending on Thursday with a second round in London later in March The EU's Chief Negotiator Michel Barnier said on Tuesday.

Fears that talks could deteriorate from an early stage will likely keep a lid on any strength in the Pound for the remainder of the month and we certainly do not envisage a substantial recovery in the current environment.

Foreign exchange markets crave certainty and fractious trade negotiations will provide ample levels of uncertainty to ensure sentiment towards Sterling remains subdued. The prospect of the currency engaging a trend lower while negotiators thrash out a deal is therefore a very real prospect.

The trend lower could be a protracted one if, as we expect, a deal is only struck just before the year-end deadline.

On the matter of fishing rights, "the UK didn't vote twice to take back control of its fishing waters to give that control up again. It doesn’t matter what the EU puts in its mandate," said the Number 10 spokesperson.

Europe is understandably anxious that an independent UK would seek to take full control of its fishing waters for the benefit of its own fishing fleet, which would severely restrict the fishing waters available to countries such as France, Netherlands, Belgium and Ireland.

It will therefore be a political imperative for the EU to retain a significant portion of existing fishing rights, but the UK knows fishing offers it notable leverage in negotiations and we would therefore expect this issue to be one that holds up the signing of a deal.

Amongst the 46-page document released by the EU on Tuesday is a requirement that the "envisaged agreement should uphold common high standards, and corresponding high standards over time with Union standards as a reference point".

This essentially requires the UK to remain in lockstep with EU regulations, certainly initially. Regarding the requirement for such a level playing field, the Number 10 spokesperson said:

"We must have full control of our own laws. We will not accept any demands for the UK to follow EU rules".

However, we are not too alarmed by the latter statement as it is a fluff; we see no explicit requirement made by the EU that the UK mirrors EU laws as they evolve. This is key: responding to evolving EU rules is referred to 'dynamic alignment' and will draw questions on how independent a post-Brexit Britain really is.

For Sterling what matters is whether or not the draft mandate is so rigid that it immediately boxes Britain into a corner that would make negotiations unlikely to succeed. Should negotiations appear to be headed for failure, the Pound could be in for a significant decline.

Without explicitly requiring negotiators to seek dynamic alignment from the UK we would suggest the EU's mandate does allow for the kind of flexibility required for a deal to be found.

After all, the EU and UK will be starting their future alignment from a point of perfect equivalence and it is highly unlikely the UK would seek to diverge in an aggressive manner in the early years of its post-EU life.

From a foreign exchange perspective 2020 is likely to see the British Pound take its direction from EU-UK trade negotiations and it should ultimately exhibit a binary up-down reaction to perceived odds of a trade deal being secured by year-end.

We maintain a view that this will only really become an issue for markets once negotiations are at an advanced stage and as such there is not yet any real reason to buy or sell the currency based on the trade negotiation narrative.

But the risk to our view is that tensions emerge from an early stage, bringing forward potential losses in Sterling.

And based on the UK's initial response to the EU's position, this is increasingly likely.

BannerAchieve 3-5% More Currency: The Global Reach Best Exchange Rate Guarantee maximises your currency purchasing power. Find out more.


BannerBrexit will impact your UK pension if you are living in the EU. Capital Rock Wealth have developed a comprehensive guide to help you navigate the uncertainty ahead.
Find out more


BannerInvest in Spanish Property. A selection of discounted properties due to the covid-19 crisis, online viewings and transactions possible. Download the guide. Download the Guide

GBPEUR download banner

Featured Content

Spanish Mortgage Specialists Mortgage Direct Secure Spanish Licence

Mortgage Direct - a Spanish mortgage broker specialising in the provision of mortgages for expats - have confirmed they have secured their Spanish license.