The Pound to Euro exchange rate fell within touching distance of a three-year low last week with traders fearing that government officials might push for a so-called ‘hard Brexit’.
GBP/EUR Sinks To Monthly Low
Sterling slid below 1.16 versus the single currency at the start of last week’s session as sentiment soured in reaction to dovish remarks from the Bank of England (BoE). Policymaker Michael Saunders noted that soft wage growth figures proved there was still slack in the domestic economy, which prompted traders to up their bets of further stimulus from the UK central bank.
BoE stimulus bets and fears that Britain may pursue a post-‘Brexit’ future outside of the single market, to allow for greater controls on immigration, weighed on demand for the Pound on Wednesday.
However, GBP/EUR ticked higher on Thursday afternoon in response to remarks from BoE official Kristin Forbes stating that the UK economy has so far performed better-than-expected in the event of a vote to the leave the European Union.
‘Hard Brexit’ Fears Materialise to Weaken Pound Sterling
It was a less optimistic day for Sterling on Friday, with GBP/EUR losing ground in reaction to a perceived discord between Britain’s ministers and leaders in Europe.
Following a spat between UK foreign secretary Boris Johnson and German finance minister Wolfgang Schauble Sterling plunged to a new monthly low south of 1.15. The tumble means that the Pound is around half a cent away from striking a new three-year low.
Johnson described claims that it was impossible to retain access to the single market without accepting free movement of people as ‘complete baloney’, while Schauble refuted the claim and offered to visit the UK foreign secretary and personally read him the appropriate section from the Lisbon Treaty. Johnson also claimed that ‘Brexit’ negotiations would begin early next year and suggested they could be finished in less than two years.
The negative market reaction appears to centre around two things: 1) that ‘Brexit’ and its ramifications could happen sooner-than-anticipated, and 2) that Boris’ combative style of communication – whether intentionally or otherwise – may lead to a ‘hard Brexit’ with Britain losing access to the single market.
Week Ahead
It’s another fairly quiet week of European economic releases, meaning that attention will probably be focussed on the UK’s impending divorce from the EU.
If frayed relations continue to suggest that the UK is heading for a ‘hard Brexit’ then we could see GBP/EUR slide to new three-year lows, while constructive discussions could prompt a little bit of profit-taking seeing as the Pound has shed around five cents over the past 20 days.