Sterling exchange rates were on course to finish the week in strong fashion last week, but an update on the state of trade negotiations from key figureheads both domestically and from the EU side scuppered much of sterling’s gains.

In the afternoon last Friday, and over the weekend it’s been reported that the EU chief Brexit negotiator, Michel Barnier is both ‘concerned’ and ‘disappointed’ at the current state of the trade talks, and he feels that a deal now ‘seems unlikely’. His UK counterpart, David Frost underlined these comments and touched on differences between the two sides regarding state aid rules and UK fisheries access.

This is a concern for the financial markets so it isn’t surprising to see the Pound lose value off the back of such comments, especially as time is running out for the two teams of trade negotiators to come to an agreement.

How likely is a deal at present?

The UK’s existing transitional deal expiries at the end of the year, and both UK and EU spokespersons have highlighted their desire to have the deals in place by October. It’s been reported that trade talks will lead up until early October, and with the EU Summit set to take place in the middle of the month trade negotiators are keen for the trade talks to have been agreed upon by then. This is so that there is sufficient time to have the new rules written into legislation before 2021.

Therefore, October is being billed as a key month for the pound this year, as depending on the comments from both sides around that time we could see volatility for the pound’s value. So far this year we have already seen the pound to euro rate hit both 4-year highs and lows, and at the time of writing the pair sit just below the mid-point between those two extremes of 1.20 and 1.05.

Economic data due out of the UK is light this week, but there will be speeches from both Andy Haldane and Andrew Bailey of the Bank of England on Wednesday and Friday with both worth being aware of. If any forward guidance on monetary policy is offered, there is the chance of a market reaction.

Is the Euro Becoming Overvalued?

July was the euro’s best performance against the US Dollar in a decade, with the single currency gaining an impressive 11% against the US dollar since the beginning of May. After a different few years euro bulls may have finally got some of the market movement they’ve hoped for, but there are now concerns from some corners that the currency may be overvalued which could prompt the European Central Bank (ECB) into acting to artificially weaken the currency. The EU has struggled with low inflation levels for some time, and it is a subject the ECB comments on quite frequently. An overvalued currency could complicate the ECB’s attempts to increase inflation levels, so this is a subject worth following.

Will the US Dollar Continue to Weaken?

Earlier this year the US dollar rocketed in value as investors were seeking safe-havens for their funds at the beginning of the Covid-19 pandemic. The response from the US in relation to the spread of Covid-19 has been terrible though, and now many are asking whether the USD remains such a safe haven currency when the US economy’s recovery from the lockdown measures is now being called into question. This has prompted some analysts to questions whether the sell-off of the US dollar has further to go, with the US dollar losing around 11% against the euro since the beginning of May. JP Morgan Asset Management’s Patrik Schowitz recently highlighted that due to the US’ faltering response to the crisis, some may now have more confidence in the euro.

It’s likely to be a busy week for the US dollar with a raft of data releases due out. Later today the housing market will be in focus and towards the end of the week there will be jobs data also in focus, so do feel free to get in touch if you wish to plan around these events.

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