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Pound Sterling steadies on renewed hope for Brexit deal

  • UK Prime Minister Boris Johnson will fly to Brussels as a last-ditch effort to secure a Brexit trade deal with EU Commission President Ursula von der Leyen
  • British pound to US dollar (GBP/USD) exchange rate and the British pound to euro (GBP/EUR) exchange rate recovers
  • Euro vulnerable to ongoing threats from Hungary and Poland on vetoing EU budget and dovish ECB outlook on Thursday

Pound Sterling (GBP) has steadied against the euro (EUR), US dollar (USD) and a plethora of other major currencies on Tuesday following news that British Prime Minister Boris Johnson will travel to Brussels in efforts to reach a Brexit trade deal.

After an hour-long phone call with European Commission President, Ursula von der Leyen, to discuss whether a Brexit deal could be reached before the end of the transition period, the two agreed to engage in high-level political talks as a last-ditch effort.

Speaking on the Prime Minister’s behalf, a Downing Street spokesperson said: “Time is slipping away, and we are in the final stages. However, we are prepared to negotiate for as long as we have time available if we think an agreement is still possible.”

The latest development has offered the British pound (GBP) some much-needed respite after Monday’s sharp declines, which were triggered by reports that UK-EU trade talks were heading towards a no-deal outcome.

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GBP/USD and GBP/EUR recovers from Boris Johnson’s no-deal Brexit threat

While pound Sterling (GBP) exchange rates remain under pressure, the British pound to US dollar (GBP/USD) exchange rate has consolidated above the USD 1.33 level at USD 1.3313.

Concurrently, the British pound to euro (GBP/EUR) exchange rate has rebounded from Monday’s one-month low of EUR 1.094 and is trading slightly higher at EUR 1.0991.

With both London and Brussels committing to intensify their efforts and break the impasse in negotiations, foreign exchange (FX) market participants appear to be more optimistic about a post-Brexit trade deal being secured.

However, the meeting between Mr Johnson and President von der Leyen will now be a key event for GBP/EUR and GBP/USD exchange rates. While a favourable outcome will likely trigger further upside in the British pound (GBP), expect negative updates to drag GBP/EUR and GBP/USD lower.

Despite pound Sterling’s (GBP) relatively weak performance, London’s blue-chip FTSE 100 Index is also on edge. As of 13:00 GMT, the FTSE 100 has plunged by 0.42% or 27.59 points to 6,527.51 owing to another day of Brexit anxiety, with investors anxiously awaiting the outcome of Johnson-von der Leyen meeting.

The date of the meeting is yet to be specified; however, given that all-important European Council assembly is scheduled for Thursday, it’s likely that Mr Johnson and President von der Leyen will meet on Wednesday.

Alternatively, The Telegraph suggests that British Prime Minister Boris Johnson and EU Commission President Ursula von der Leyen could convene after the European Council meeting – on the weekend, which would give EU leaders time to agree on a new directive.

Euro traders eyeing ‘Super Thursday’

While Brexit related headlines have a profound impact on pound Sterling (GBP), the reality is the euro (EUR) will also be affected by the outcome of UK-EU trade talks over the long-term.

The single currency fluctuated during Monday’s trade sessions due to Brexit uncertainty and its likely that volatility will persist over the coming days with the pivotal European Council meeting and European Central Bank (ECB) monetary policy statement commencing on Thursday.

At the time of writing, the euro (EUR) is outperforming the British pound (GBP), while the euro to US dollar (EUR/USD) exchange rate is flat at USD 1.2114.

The EU’s seven-year EUR 1.82TN budget and coronavirus recovery fund continues to face political resistance from Hungary and Poland. They are threatening to veto the spending plans as it violates the bloc’s democratic standards.

Both European Economic Area (EEA) countries are being pressured to drop the veto and unlock talks or risk losing out on billions of aid for their relative countries as the bloc will go ahead and exclude them from spending plans.

However, this could trigger a political crisis in the European Union and force the EU into a partial shutdown in the New Year, whereby member countries would only be able to operate on monthly emergency budgets.

Immense fiscal support is needed now more than ever due to the impact of the Coronavirus pandemic, and yet despite the high stakes, FX markets appear to be relatively unconcerned about the downside risks for the EU, evident in the euro’s (EUR) relatively strong performance.

Though EUR/USD is flat, the currency pair continues to hold around its highest levels since 2018, and the single currency is up by 1.65% on the month against pound Sterling (GBP).

However, the euro (EUR) could suffer some downward movement following the ECB’s monetary policy announcement.

For weeks now, the central bank has tried to talk down the euro (EUR) and has indicated that it will be introducing more aggressive policy measures to support the Eurozone economy.

Given that EUR/USD has appreciated by 3% since November despite rising global COVID-19 cases and further restrictions being imposed in European countries, it’s unlikely that there won’t be any further action ECB as this will be a significant point of concern.

Not only is the ECB is expected to expand its quantitative easing programme, but they will likely leave the door open for additional measures, which could weigh on EUR.

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