With further fiscal loosening and negative interest rates being the rumour in The City, as mentioned by Jack in yesterday’s update, most of the blame has been levelled at the Bank of England for the recent slump. However, whilst it is undeniable that the BoE’s next move has impacted the pound to a certain degree in the short-term, the more telling sign of the increasingly bearish sentiment can be seen in the sharper drop-off seen on GBP/EUR over GBP/USD: namely, Brexit fears are now beginning to drive the price over Covid-19.
Over the last few weeks, I’ve commented on the deadly cocktail of Brexit and Covid-19, mentioning how it could adversely dent sterling’s price over other currencies looking to escape lockdown, simply as the UK has far more on its plate than others. At the time, headlines and lockdown-exiting rumours were driving the price, now it seems clear that Brexit has made its way out of the background and into the forefront of trader’s minds.
With so little progress made in the two rounds of negotiations to date, markets have little reason to believe that the UK and EU will suddenly solve all of their differences in the final round next month. The key dates in June to take note of if you have a transfer involving sterling would be the date of the final round of negations when announced, the 18th-19th of June where the EU Council will meet and June the 30th for the final deadline for an extension.
As we have seen so many times before with the pound and Brexit, a collapse would occur as we approached a Brexit deadline before an inevitable extension; however, this time, sterling faces far more obstacles if it is to obtain an extension – namely, a large majority Government committed to the deadline, UK law forbidding such a request and of course, Covid-19 prioritisation. If the swings on sterling were bad before, they could be about to get a whole lot worse.
Have a good weekend.
Author: Joshua Haden-Jones, Senior Relationship Manager
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