Pound Euro (GBP/EUR) Exchange Rate Rallies as UK-EU Reportedly Close to Resolving Brexit Dispute
(Updated 14:25, 17/2/23) The Pound Euro (GBP/EUR) exchange rate bounced off a ten-day low this morning amid hopes that a long-running dispute over the Northern Ireland Protocol was close to being resolved.
Sterling initially fell sharply on Friday morning, despite better-than-expected UK retail sales results.
However, news that the UK and the EU are close to signing a new agreement to update the Northern Ireland Protocol lifted the Pound (GBP).
The Protocol is part of the post-Brexit trade agreement signed by London and Brussels, designed to avoid a hard border between Northern Ireland (NI) and the Republic of Ireland after the UK left the single market.
However, the Protocol has proved a thorny issue. Unionists argue that the deal creates a de facto border between NI and the rest of the UK, while some people believe the post-Brexit agreement gives the EU too much power.
Former Prime Minister Boris Johnson threatened to unilaterally scrap the NI Protocol, a move that many feared would unravel the UK-EU post-Brexit trade deal and spark a trade war. These worries have had a huge impact on the Pound Euro exchange rate over the past few years.
The issue has been out of the limelight for many months, but is now once again hitting the headlines. It seems that a deal is close to being reached, with some outlets reporting that an announcement could come as soon as Tuesday.
Once the NI Protocol issue is settled, the threat of a trade war will recede and the UK will be in a better position to negotiate new deals with the EU, US, and other economies around the world. This optimism lifted Sterling.
At the time of writing, GBP/EUR is trading at €1.1258, up almost 0.3% from today’s opening level.
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Pound Euro (GBP/EUR) Exchange Rate Falls amid Downbeat Market Mood
The Pound Euro (GBP/EUR) exchange rate dropped to a ten-day low this morning, despite upbeat UK sales data, amid a risk-off market mood.
At the time of writing, GBP/EUR is trading at €1.1211, down around 0.15% from the start of today’s European session.
Pound (GBP) Stumbles despite Retail Sales Growth
The Pound (GBP) fell sharply as Friday’s session started, despite a surprise rise in UK retail sales.
Economists had expected sales to have contracted by 0.3% last month. Instead, they grew by 0.5%, spurred on by January deals and cheaper fuel.
The seemingly upbeat headline figure failed to cheer GBP investors, as it came with caveats.
December’s slump in sales was worse than initially feared, printing at -1.2% rather than -1%. In addition, retail sales remain 1.4% lower than their pre-pandemic levels in February 2020.
The Office for National Statistics (ONS), which published the data, warned that despite January’s rise, ‘the general trend remains one of decline’.
Paul Dales, Chief UK Economist at Capital Economics, explains why today’s 0.5% rise may not be as strong as it initially seems:
‘First, retail sales were very weak last year but overall consumer spending held up due to stronger non-retail spending (particularly in restaurants). When households’ finances are under pressure, it possible that any improvement in retail sales will be just be met by a softening in non-retail spending.
‘Second, although the biggest falls in real incomes are now behind us, the full drag on activity from higher interest rates has yet to be felt. As such, it is too soon to conclude that the retail sector is coming out of its funk and that the economy won’t yet fall into a recession.’
Euro (EUR) Rises amid Risk Aversion
Meanwhile, the prevailing risk-off mood in markets is giving the safer Euro (EUR) a lift against the riskier Pound.
Although markets have been generally upbeat through the beginning of 2023, economic and geopolitical worries are starting to dent investor optimism. China-US tensions are growing, the Russia-Ukraine war rages on, and central banks may need to keep raising interest rates to combat persistent inflation.
With the current sentiment among investors decidedly downbeat, EUR is gaining against GBP.
Pound Euro Exchange Rate Forecast: Can Sterling Find Late Success?
As this week’s session comes to a close, Sterling looks set to end things on a sour note. However, while there is no more UK or Eurozone data due out today, there are other factors that could impact the GBP/EUR exchange rate.
For the Pound, political news could drive some movement. UK Prime Minister Rishi Sunak travelled to Belfast last night, leading to speculation that the government may be about to sign a deal to end the long-running dispute with the EU over the Northern Ireland Protocol.
The dispute over the Protocol has hammered the Pound in the past, with investors worried that failure to resolve the deadlock could see the post-Brexit trade agreement unravel. If UK and the EU agree a deal today, Sterling may find some support.
Turning to the Euro, traders may take their cues from Russia-Ukraine headlines. Although Russia seems to be launching a fresh ground offensive, there are hopes that a UN General Assembly vote next week could take steps towards achieving peace. While hopes of peace may support EUR, any pushback from Moscow or Kyiv could dent the currency.