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Brexit talks and currency markets: what you need to know

Brexit talks and currency markets: what you need to know

After a turbulent few months, negotiators from both sides are still in the process of thrashing out the details of a trade deal between the UK and the EU. Prime Minister Boris Johnson held a phone conversation with EU Commission President Von der Leyen and both agreed that there are still significant differences between both sides. 

Despite this, EU Chief Negotiator Barnier and his team will be in London for further talks and there will be strong pressure to conclude a framework deal as we get closer to the deadline. Michel Barnier had stated that both sides ‘must compromise’ if a deal is to be reached, but the nature of that compromise remains to be seen.

There is potential volatility ahead with the Pound’s value dependent on how the latest round of Brexit negotiations goes. Officials on both sides are striking an optimistic tone, likely to be reflected by investors hoping for a bump should a deal be reached by the mid-November deadline. While there is still likely to be some day-to-day volatility, the Pound’s short term outlook is almost entirely dependent on whether or not a deal is reached and the qualities of said deal. Even if a deal is reached, a resulting rally may not survive any further shocks, whether that be from a declining coronavirus situation or an ineffective recovery package.  

While Brexit talks will certainly have an effect on the Pound’s parity to the Euro, the Euro’s short to medium-term outlook against other major counterparts is far more predicated on the effectiveness of the EU’s coronavirus recovery funding schemes, including grants, low-cost loans, and an unemployment insurance scheme known as ‘Sure’. The initial issuing of bonds to raise funds for these programmes was vastly oversubscribed, implying some confidence in the Euro as a debt-issuing currency. However, the European Central Bank has been hostile to a rising Euro due to fears around how this would affect inflation, and in turn the effectiveness of their recovery schemes.

Furthermore, the full implications of the virus’ resurgence throughout Europe is yet to be seen, but any effect on currency markets is far more likely to be predicated on the EU’s response rather than any individual member states’ economic slowdown. The same is somewhat true of the UK and GBP, with the long term health of every aspect of the economy predicated on the success of recovery schemes. The £150 billion stimulus package certainly helped in providing support for GBP amid the announcement of a second lockdown. 

The important thing to note is that with the ongoing coronavirus situation and a hard-Brexit still being on the table until a deal has been reached, volatility over the coming months is extremely likely and important to prepare for. 

To find out how you can begin reducing the risk of exchange rate volatility speak to one of Currency UK’s foreign exchange experts by calling +44 (0) 20 7738 0777.

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