The euro's recent decline continued this week, as the single currency finally succumbed to the pressure which has been steadily building recently. This downturn was accentuated by an apparent “breakthrough” in Brexit talks, but in truth, the sell-off of EUR currency positions is unlikely to have been dictated by a sudden spike in market confidence for the pound.
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The UK’s current economic position remains fragile at best and investors risk appetite for GBP has mirrored this. The pound has found only pockets of support over recent months, with a steady decline across the board; the only obvious trend since the UK’s decision to exit the single bloc.
This in itself has allowed the EUR to largely hold its position against the pound since the turn of the year, even when its own economy started to show worrying signs of a slowdown.
Despite the recent false dawns for sterling and the uncertain nature of Brexit, indicating that negotiations with the EU are unlikely to progress unchallenged from this point, I am not expecting the EUR to recover its recent losses against the pound, certainly not in their entirety.
Any major bounce back from the current levels is likely to be heavily reliant on a complete breakdown in Brexit talks, to the point where the UK is left in the very unfavourable position of exiting the EU without a deal being in place.
Whilst economic politics are unpredictable to say the least, this scenario seems to be viewed as the worst outcome by both sides.
This newfound belief that either a deal and/or an extension will be reached has brought with it an element of relief
Investors have reacted accordingly by buying up GBP positions, at levels which could be considered excellent value in the months ahead.
Whilst I accept that the prospect of some sort of finality to the long and arduous Brexit process brings with it a huge amount of relief, we must remind ourselves that as of yet there is no deal in place, only choice words and positive political spins.
Both investors and the public alike have heard various reports of a potential “breakthrough” in talks but almost two years into negotiations and we are still in Brexit limbo.
I will continue to remain optimistically sceptical that a deal will be reached but whether this is a good deal for the UK, or one that is even in place by the current deadline of March 29th is another question altogether.
Whilst the current levels will feel uninspiring to those EUR sellers who have witnessed the single currency outperform the majority of its counterparts for such a sustained period, the key question they should ask themselves now is whether or not they feel a no-deal Brexit is worth gambling on, as it is this outcome, which in my opinion, offers the most likely route back towards the post referendum highs.