Since the start of this year, there have been very few reports on Brexit to impact sterling exchange rates, however deteriorating relations between the UK and EU are now expected to be a focus point for news channels and investors alike, and therefore could provide a volatile period of trading for the pound.
Reports yesterday suggest a potential trade war between the UK and EU could be looming, as neither side has managed to reach an agreement on the implementation of the Northern Ireland protocol. The EU have threatened to impose tariffs on UK exports unless the UK fully implements the terms of the Northern Ireland protocol next month.
Since the UK left the EU at the end of last year, relations between the two sides have been fractious, although worsened by accusations of bad faith over part of the trade deal which includes movement of goods to Northern Ireland. The media have dubbed it the ‘sausage war’ because it impacts the movement of chilled meats.
Officials from both sides met yesterday, and talks will continue today, joined by US President Joe Biden who is currently on an 8-day European mission to re-establish trans-Atlantic ties, his first trip of this kind since taking office. The UK and EU failed to reach an agreement on any solutions for post-Brexit trade with Northern Ireland yesterday, with both sides exchanging threats which could make the G7 Summit this weekend particularly interesting. According to The Times newspaper, US President Joe Biden is expected to step in and tell the UK to respect the deal with the EU, designed to protect the 23-year-old peace settlement with Northern Ireland.
The topic of Brexit has historically proven to be a problematic one for the pound, often resulting in sterling weakness, therefore any further information from these discussions could weigh heavily on the value of the pound. Clients with upcoming currency exchange requirements involving the pound could benefit from contacting their Account Manager here so that we can be your eyes and ears in the market.
The euro strengthened throughout the day yesterday against the pound and US dollar, despite worse than expected German trade balance, imports and exports data being released. The Trade Balance data, which is the balance of exports and imports, came in at €15.9bn compared to the €14bn expected, although still shows a trade surplus which is positive for the economy.
Added to this, a report published by the European Council of Foreign Relations yesterday showed a fall in Europeans’ confidence in the EU, highlighting its late response to the pandemic and vaccination rollout as its main cause for the drop in confidence. The authors have called out for European leaders to take the results as a wake-up call, as dissatisfaction with national political systems and the need for a more cooperative bloc were both common themes in the survey.
However, some positive signs came from official figures released by Eurostat showing that the number of unemployed people in the euro area fell by 1.8%, and by 1.6% in the eurozone, in the last 3 months compared to the same time last year.
Yesterday’s EUR/GBP gains are likely due to Brexit concerns, with the UK and EU potentially heading for a trade war, causing the pound to weaken across the board. More information on this can be found in the sterling section of this report, however could have the potential to impact Euro exchange rates in the coming days depending on the outcome.
Another potential mover for euro exchange rates comes this afternoon at 1.45pm, as the European Central Bank will release their latest Interest rate and deposit rate decision which are expected to remain at 0% and -0.5% respectively. Considering the sharp fall in confidence reported yesterday, how the ECB look to position themselves as we emerge from the pandemic will be keenly watched for by investors. If you have a short-term currency transfer to make involving the euro, you may wish to speak to our team ahead of this announcement to help you to plan around this key event.
Yesterday bought a relatively quiet day for US economic news and events, somewhat overshadowed by the UK and EU’s potential trade war looming, with US President Joe Biden joining leaders from the UK and the EU at the start of his 8-day trip to help re-build trans-Atlantic ties.
However, some positive news for the US and therefore the US dollar came from Wells Fargo, who released its full US economic outlook report yesterday, which included upgraded forecast for GDP (Gross Domestic Product) to grow to 7.3%. If this were to come to fruition, it would be the strongest growth in a year since 1951. Spending is expected to continue upwards, as vaccinations continue to reduce the risk of COVID-19 and allows more of the economy to open.
This afternoon sees a variety of important data releases which could impact US dollar exchange rates. These include Initial and continuing jobless claims which are both expected to fall, along with Consumer Price Index or Inflation, expected to fall from 0.9% to 0.4% in May compared to April, but rise from 3% to 3.4% year on year. If these figures are released lower than expectation, we could see the US dollar weakness as we end the week.
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