Ellie Allen

British Pound Slips Further as Brexit Worries Resurface


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Pound/Euro (GBP/EUR) slumps to around €1.11

Pound/US Dollar (GBP/USD) weakens to $1.25

Euro/US Dollar (EUR/USD) remains rangebound at $1.13

Pound/Australian Dollar (GBP/AUD) slumps to AU$1.81

The Pound came under more pressure in June, slipping against the major currencies such as the US Dollar, the Euro and the Australian Dollar. There are several reasons that have been put forward to explain this, the most important of which is the state of the Brexit negotiations between the UK and the EU. Boris Johnson is optimistic that a deal can be struck, but currency markets are a bit harder to convince and at present the market is biased towards a no-deal scenario. Against this backdrop, it is hard for the Pound to fight back against its recent losing streak and break out higher.

Another reason for the Pound’s poor performance in June is the continued drip-feed of poor economic news. The UK economy actually shrank by more than expected (-2.2 percent rather than -2.0 percent) in the first quarter – and this is only a small part of the story as the second quarter figures will be far worse. At the same time it was revealed that business investment in the UK economy had fallen by 0.3 percent, which was the second consecutive quarter of contraction. These figures served to further limit Sterling’s value in relation to the other majors.

UK JOBS LOSSES MOUNT AS COVID-19 ECONOMIC HAVOC CONTINUES

The start of July has seen news headlines filled with reports of jobs losses across the UK economy. The retail and aviation sectors have been particularly badly affected, with thousands of redundancies and several major insolvencies being announced. Although not directly impacting the strength of Sterling, these job losses will weaken the UK economy and could feed into a reduction in sentiment towards the Pound if they get any worse.

POUND TO US DOLLAR (GBP/USD) CONTINUES DOWNTREND DESPITE THE DOLLAR GENERALLY WEAKENING

Over the first part of June we saw the Pound regain some lost ground against the US Dollar, rising as high as $1.27. The main reason for this was that traders were willing to start taking risks again as the general feeling was that the economic effects of the Covid-19 pandemic were coming to an end.

This reversed around 10 June when reports of new regionalised outbreaks began to emerge, and the Pound continued on its weakening trajectory against the Greenback, finishing up the month at $1.24.

One of the surprising things about this was the fact that the US Dollar itself was generally weakening over the month, so it was the Pound’s general Brexit-induced weakness that proved to be the driver for its devaluation.

EURO KEEPS UPPER HAND OVER THE POUND … BUT FOR HOW LONG?

The Pound didn’t fare too well against the Euro in June either, starting off the month at €1.12 and ending it at €1.10. This was merely a continuation of a longer trend which began back in April, and the Pound is now at a three-month low against the single currency.

Aside from the Brexit-related Pound weakness, the Euro managed to maintain its position of strength over Sterling despite suffering from the same kind of cataclysmic economic data that is affecting the UK. Markets, however, are choosing to focus on the huge €750bn stimulus package promised by the European Central Bank to deal with the economic fallout from the Covid-19 lockdowns. Moreover, flash PMI figures – which give an instant gauge of the economy – seemed to indicate that the Eurozone economy was swiftly rebounding from the earlier shutdowns.

While this sounds promising for EUR investors, it remains to be seen how long this Euro strength can hold out given the political divisions that are beginning to emerge between member states on how the ECB’s stimulus money should be spent, or whether it should be approved at all.

POUND FALLS AGAINST CANADIAN DOLLAR AS OIL PRICES GAIN

The price of WTI oil (the main crude blend traded in North America) put in some gains in June, rising to around $40 a barrel. This had a knock-on effect for the Canadian Dollar and saw GBP/CAD fall from CA$1.71 in early June, to CA$1.68 by the end. The Pound has since made some gains on the Loonie and is currently trading at CA$1.69.

AUSTRALIAN DOLLAR CONTINUES TO STRENGTHEN AS RISK APPETITE RETURNS

During the early days of the Covid-19 scare the Australian Dollar was pummelled on world markets as investors took fright due to Australia’s close ties with China, and also because the currency is considered a risky asset sensitive to global trade issues.

Nevertheless, the Aussie has been resurgent since the end of March as investors sought out risk once again and June was no different. We saw GBP/AUD decline from AU$1.84 at the start of the month to finish up at AU$1.80 by the end. This is despite reports of regionalised outbreaks of coronavirus, and some Australian metropolitan areas being put under lockdown once more.

WHAT TO LOOK OUT FOR IN JULY

The FX markets are currently moving in and out of ‘risk-on’ and ‘risk-off’ mode, meaning traders are assessing whether future global trade disruptions are serious enough to warrant moving their funds into safe havens like the US Dollar at the expense of other currencies.

Neither the Pound nor the Euro perform very well during risk-on periods, so we can expect to see more pressure on these currencies in July if the current uptick in new Covid-19 cases continues. At the same time, the US Dollar is likely to strengthen correspondingly.

Another factor to watch out for is whether the EU member states can agree on the ECB’s stimulus package, or whether it is rejected. If the latter comes to pass then the Euro could weaken substantially – we may find out on 17 July when leaders meet.

As ever, however, Brexit is lurking in the background, and the progress (or not) of the intensified talks over the next few weeks will almost certainly dictate whether the Pound rallies on FX markets, or falls back further. As it stands, analysts think it unlikely that a trade deal will be struck between the UK and the EU over the next few weeks.

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