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Pound Sterling tumbles against euro amid Brexit headwinds

The British pound to euro (GBP/EUR) exchange rate reached a high of EUR 1.1177 in mid-week trade due to a combination of hopes for a “Blue Wave” sweep in the US elections and Brexit progress.

Thursday’s Bank of England (BoE) monetary policy statement offered further support, with policymakers announcing an additional GBP 150BN of quantitative easing to prop up the UK economy.

However, GBP/EUR has retreated towards the EUR 1.10 level on Friday, following EU Chief Brexit Negotiator Michel Barnier’s downbeat assessment on the prospect of a UK-EU free trade agreement (FTA) being reached before the end of the transition period.

At the time of writing, the British pound to euro (GBP/EUR) exchange rate is trading 0.4% lower at EUR 1.1065, with the latest development expected to keep pound-based exchange rates depressed over the coming week.

Brexit trade talks race against the clock

EU Chief Negotiator warns of Brexit roadblock

Michel Barnier warned that Brexit trade talks are “not on a trajectory” to get a deal and it’s unlikely that one will be reached unless the United Kingdom alters its approach.

Mr Barnier told MEPs that the deadlock on fisheries and competitively remains unsolved, adding that he had demonstrated a willingness to compromise but  Britain had not reciprocated.

With Brexit negotiators struggling to reach an accord on their future relationship, foreign exchange (FX) markets are being reminded that pound Sterling (GBP) remains exposed to a significant degree of downside risk.

Although the UK is believed to be calling on the EU to intensify talks ahead of next week’s de factor deadline, The Sun’s Brussels reporter, Nick Gutteridge, said Mr Barnier is reluctant to engage. According to Mr Gutteridge, the EU Chief Negotiator fears that London wants to turn the remaining days of Brexit negotiations into a mass haggling session.

Michel Barnier believes UK Prime Minister Boris Johnson is scheming a “tug of war” over as many as 30 outstanding issues with EU Commission President Ursula von der Leyen, German Chancellor Angela Merkel and French President Emmanuel Macron.

Another EU source stated that Mr Barnier was inflamed by the Prime Ministers constant attempts to undermine him and engage in discussion with more lenient EU leaders.

Meanwhile, former Dragon’s Den personality, Theo Paphitis, has ridiculed the European Union over their handling of Brexit, claiming that the EU is a “failed project” and that Britain will thrive irrespective of a free trade deal.

No-deal Brexit risk between EU and UK

Latest EU GDP forecasts assume a no-deal Brexit

The EU Commission seems to think that the bloc will be entering 2021 without a post-Brexit deal, given their recent economic forecasts.

According to the latest economic growth projections, the bloc will expand by 4.1% in 2021, down from summer’s 5.8% forecast, while euro area gross domestic product (GDP) estimates have decreased by nearly 2%.

The EU Commission said the new forecasts reflected the economic fallout expected from the second lockdowns and assumed that the UK and the EU would be trading on World Organisation Terms (WTO).

While the Bank of England’s (BoE) forecasts continue to anticipate a Brexit deal, the EU’s update appears to have rattled investors, with more concern being raised over the UK’s economic outlook.

Most expect the UK to suffer more economic fallout than the EU in the event of a no-deal Brexit, as Britain would lose access to the EU’s single market and customs, which accounts for half of the UK’s overall trade and foreign investments.

That being said, the BoE’s projections do assume that transnational trade with the bloc collapses in the first half of 2021, which could calm nervous investors.

However, as the UK enters 2021 without a Brexit deal, this will likely cause policymakers to revise growth forecasts and ramp up monetary policy.

Pound Sterling outlook: political headwinds to blow into 2021

A recent analysis from Rabobank reveals that the outlook for pound Sterling (GBP) will remain gloomy in the first half of 2021, irrespective of whether the UK and the EU reach a free trade agreement this year.

According to Rabobank forecasts, the pound to euro exchange rate (GBP/EUR) exchange rate will go no higher than the EUR 1.14 level a year from now. Similarly, the British pound to US dollar (GBP/USD) exchange rate is expected to meet resistance at USD 1.30 in three months’ time and USD 1.34 in one year.

While Pound sterling (GBP) has been one of the strongest performing currencies since late September amid increased hopes of the UK and the EU reaching a Brexit deal, the newest finding will undoubtedly disappoint Sterling traders believing an FTA would trigger a sizeable rally.

Trade talks are expected to restart in London next Monday, with FX market participants widely anticipating a breakthrough in negotiations by November 19th – when EU leaders are scheduled to meet at the next summit.

Although fisheries and the competitive level-playing field remain major sticking points in UK-EU negotiators, political commentators believe that both sides will be able to reach a post-Brexit deal.

However, it is unlikely that we will see any concrete progress before this point, so GBP/EUR and GBP/USD may remain subdued in currency markets.