Above: Boris Johnson. © Pound Sterling Live. Still courtesy of Parliament TV

Pound Sterling raced to fresh multi-week highs against the Euro on Thursday, July 26, before staging a dramatic turnaround amidst a broad-based comeback in the Euro following the European Central Bank (ECB) event in Frankfurt and persistent Brexit uncertainties.

The decline takes the exchange rate back to the 1.11 level where it is quoted on Saturday, ensuring a 0.14% decline over the course of the week.

This means the GBP/EUR exchange rate has extended its record losing streak to 12 consecutive weeks, an unprecedented fall.

The decline was aided by growing signs of a head-on clash between the UK and EU over the matter of renegotiating the existing Brexit deal, boosting fears that another General Election would be needed to break the current deadlock.

Brexit developments are firmly back on the radar for Sterling now that a new Prime Minister is in charge of the country and he has started spelling out his vision.

Reports suggest Prime Minister Boris Johnson and European Commission President Jean-Claude Juncker engaged in a phone call on Thursday, and the outcome confirms what most expect: the EU and UK are on a collision course over Brexit that they simply might be unable to resolve in time to avoid a 'no deal' Brexit.

"In a phone call with the newly elected UK PM Boris Johnson, European Commission President Jean-Claude Juncker slapped away hopes of a new Brexit pact by stating that the current one is 'the best and only' deal possible. Johnson assured that the British government is 'turbocharging' preparations for a hard exit," says Vladimir Miklashevsky, a Senior Economist and Trading Desk Strategist with Danske Bank.

Ahead of the weekend, tensions between the European Union and UK ramped up when Norbert Roettgen, a German lawmaker and ally of Chancellor Angela Merkel, said the European Union will not be bullied into compromising its principles.

Roettgen, chairman of the German Bundestag's Committee on Foreign Affairs, said in a tweet late on Thursday: "Dear Boris Johnson: Neither boastful speeches nor bullying will succeed in making us give up EU principles and unity.

"Will stay cool instead. Sadly, both in words and deeds - has appointed a cabinet of Brexiteers - Johnson fails to reach out to country and continent."

In his first appearance in the House of Commons as Prime Minister, Johnson said that the Northern Irish backstop has to be scrapped altogether, and that time limit or exit mechanism not enough. If no deal was reached, then the UK would withhold the £39BN annual payment it makes to the EU.

Asked in Parliament why he thought the EU would even consider renegotiating - when they have clearly stated they would not - Johnson says he believes compromises must ultimately be found if a 'no deal' is to be avoided.

"Why begin by assuming that our EU friends will not wish to compromise? I think they have every reason to want to compromise, and that is what we will seek," said Johnson.

The European Union has repeatedly said it will not consider opening up the Withdrawal Agreement to renegotiation, and that the backstop would stay intact.

The clash between the two sides will surely only raise expectations for a 'no deal' Brexit, something that Johnson also told MPs he stands ready to deliver.

Pound Sterling had been in recovery mode over recent days and has hit fresh July highs against the Euro during the course of the past week, but there remain concerns as to whether the rally is able to extend too much further amidst chronic political uncertainty.

The price action over the past 24 hours confirms our suspicion that there is no fundamental basis to expect any long-lasting and meaningful Sterling strength in the current environment of chronic political uncertainty.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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GBP/EUR Rally to Multi-Week Highs Fuelled by the ECB...

The Pound-to-Euro exchange rate had rallied to 1.1245 on Thursday, its highest level since June 21 as markets reacted to a downbeat statement issued by the ECB that suggests further interest rate cuts and quantitative easing would be announced imminently. When central banks engage in such programmes the currency they issue tends to fall.

Readying for further Euro-weakening stimulus, the ECB tasked Eurosystem committees to study options to easy policy further while expressing a desire for a symmetrical inflation

approach.

"In our view, this has set the scene for a deposit rate cut, which we expect to be announced at the September meeting (we expect a 20bp rate cut), paired with a restart of the QE programme and extended forward guidance. Markets are currently pricing 12bp of cut in September," says Miklashevsky.

ECB President Mario Draghi said in his press conference following the release of the statement that a “significant degree” of stimulus is needed and the outlook is “getting worse and worse”.

These developments pushed the Euro lower across the board, and allowed the GBP/EUR exchange rate to print fresh highs.

... And GBP/EUR Decline Fuelled by the ECB

However, Sterling's rally against the single Eurozone currency proved short-lived with the ECB event proving unusually volatile.

"While the initial ECB statement suggested a more dovish stance and almost a precommitment to a broader stimulus package, Draghi struck a more balanced tone during the press conference," says Christopher Graham, Europe Economist with Standard Chartered. He noted that rate cuts were not considered at the July meeting, and gave no details on the timing, order or parameters of other policy options being considered; he deferred instead to the conclusions of the committees exploring these options."

Draghi also noted, "policy makers still see recession risks as “pretty low”.

What Draghi giveth, Draghi taketh: the market sent the Euro into recovery mode on hearing Draghi's words.

The price action on the charts show the Euro fell, and then recovered its poise to return to familiar ranges suggesting markets have already 'priced in' future action at the ECB.

Above: Sterling-Euro volatility around the time of the ECB event.

Time to move your money? Get 3-5% more currency than your bank would offer by using the services of foreign exchange specialists at RationalFX. A specialist broker can deliver you an exchange rate closer to the real market rate, thereby saving you substantial quantities of currency. Find out more here.

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