The Pound has fallen away since last week, dropping from €1.14 down to €1.12. The reason for the drop? You've guessed it; Brexit. Since September last year, the GBP/EUR rate has been stuck in a range between around €1.12 and €1.14. This time a week ago we were at the upper end of this range, but today we're back at the lower end of the range. Seemingly this pair is stuck at these levels without able to make any progress.
Brexit uncertainty keeps downward pressure on Sterling
The reason for last week's fall is continued uncertainty about what is happening with Brexit negotiations. We saw salvos fired from both the EU and Theresa May in the last few weeks, and is not at all clear whether the UK and EU can agree a transition deal. There will have to be concessions made, and at present it seems to be that the EU are unwilling to actually negotiate, instead laying down red lines that they know will be impossible for the UK government to adhere to. This is probably simply a strategy to try and unsettle the UK side, which is in a state of disarray anyway with different factions within the Conservative party making May's job extremely difficult. This means little progress has been made, and this continued uncertainty is what sent Sterling lower last week.
Will the UK and EU agree a deal this week?
If they can agree a transition deal, which is hopefully what they will do this week, then it will remove much uncertainty and also mean it's likely the Bank of England will start to raise interest rates in the next few months. Should this happen then I would expect GBP/EUR Rates to recover back to the upper end of it's current range to as high as €1.15. If however the EU and UK don't make concessions and stay behind their 'red lines' then it's highly likely the Pound will continue to struggle until progress is made.
Personally I think that Theresa May's speech last will struck a conciliatory tone, and could pave the way to showing some flexibility which could help the break the deadlock and move talks forward. The EU are due to give some feedback this week and we could learn more about how they will approach talks. All of this will be what drives Sterling exchange rates this week, and I don't think much attention will be paid to the usual economic data releases.
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