The GBP/EUR exchange rate fell sharply this week as markets were spooked as the UK government outlined its aims for UK-EU trade talks.

Pound Tumbles on No-Deal Brexit Fears

The Pound plummeted this week, mostly in response to renewed concerns of a possible no-deal Brexit.

This was initially driven by comments from a Downing Street officials who stated the government’s key aim in trade talks with the EU will be to ‘restore economic and political independence from 1 January 2021’.

However a more substantial Sterling selloff was triggered on Thursday with the official publication of the UK government’s mandate for trade negotiations with the EU.

This saw GBP/EUR collapse to a near three-month low in the latter half of the week as it revealed the UK may walk away from trade talks in June unless there is a ‘broad outline’ of a deal.

Meanwhile, the Euro faltered at the start of this week, with the single currency being undermined by a significant outbreak of the coronavirus in Italy.

However EUR exchange rates roared back to life in the second half of the week surging on the back of a weakened US Dollar as well as hopes Germany may be planning to implement some fiscal stimulus in the near-term.

Brexit Trade Talks to Infuse Volatility into Sterling?

Looking ahead, we expect the GBP/EUR exchange rate to be met by significant volatility next week as trade negotiations between the UK and EU finally get underway.

Given the fundamental differences between the UK and EU on a number of issues, GBP investors aren’t holding out much hope for the first round of trade talks, likely limiting any upside in Sterling for the time being.

For EUR investors the focus next week is likely to be on the Eurozone’s latest consumer price index, where an expected slowing of inflation in February could drag on the Euro.

EUR investors are also likely to keep a close eye on coronavirus developments, with the single currency likely to face considerable headwinds if more cases outside Italy begin to emerge in any great number.

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