While investors have been preparing for a Brexit deal as early as next week, official briefings on Thursday and Friday are expected to cause volatility. On Thursday, the pound fell as global markets turned cautious after a “media report that EU leaders will demand the European Commission publish its plans for what will happen if there is no deal,” Reuters reported.

On Thursday, EU leaders will address outstanding issues like fisheries and “level playing field” provisions as they meet via a video call. Executive Vice President of the European Commission Valdis Dombrovskis said: "We're in the final push. There are still important elements to be resolved, substantial work to do. We've seen many deadlines come and go but there's one we'll not be able to move - Jan 1. We're now in the last moments."

Bloomberg News reported that a new trade agreement between the UK and Canada, could come as early as Thursday: “Reports that the UK and Canada are very close to reaching a post-Brexit trade deal are undoubtedly good news for both economies, but with time dangerously running out on a EU-UK trade deal, sterling is struggling to react positively to the news.”

Thursday and Friday to create pound volatility

The Sun newspaper’s Nick Gutteridge said that France will be determined to retain its access to UK waters post-Brexit and if it does not move on fisheries this could create more anxiety for markets. The UK is said to expect a final push from various leaders in the summit as they put more pressure on the UK for more concessions. Thursday’s summit might have a negative impact on the pound as markets reconsider the possibility of a deal.

On Friday, EU Chief Brexit negotiator Michel Barnier will brief European representatives of the EU's 27 member states, and markets will be closely watched for any signs of a deal. UK Chief Negotiator David Frost had told Prime Minister Boris Johnson on Tuesday that a deal was possible as early as next week.

How the pound will react?

“Observers still expect a deal early next week or in the first week of December. Market participants are similarly not that concerned over the risk of No Deal Brexit at this point in time,” wrote MUFG strategist Lee Hardman. “There is likely to be a much larger pound move to the downside if both sides fail to reach a deal (-5% to -10%), while we expect a modest move to the upside for the pound if a deal is finalized (+1% to +4%),” he said.

Analysts at UBS noted that there will be a "meaningful bounce" in the Pound if a deal is signed: "The latest news flow points to an agreement being struck just in time for ratification by the EU Parliament. Given markets - and hedge funds specifically - are relatively under-positioned for such an outcome, we’d expect a meaningful bounce for GBP on even a confirmed ‘skinny deal’ outcome." But a positive outcome also means good news for the pound and the UK economy which they tend to benefit if the global economy is doing well. The UBS analyst stated: "This is intuitive given the degree of openness of the UK economy and bodes well for a recovery in global growth into 2021. Naturally, the link has weakened since the 2016 referendum, but cheap valuations offer some hope of at least a partial snap-back in compensation. And the UK economy stands to benefit more than most in 2021 as it was hit particularly hard by this year’s pandemic.”

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On Wednesday (03/06/20), the Euro was up against the US dollar, marking its seventh consecutive day and the “longest winning streak since December 2013.” The euro’s surge is the result of investors moving away from the US dollar as well as news that the European Commission will be helping the Eurozone economy with a 750 billion euro ($826.5 billion) fund to ease the damage from the pandemic.

The Euro had a roller coaster ride the last few years. Recently, due to slower economic growth, the Euro has dropped, but there have been signs of increase as the Covid-19 pandemic hit financial markets and investors turned towards the safety of government bonds. But soon it fell again, as investors turned to safe-haven assets such as the US dollar. Since mid-March, the euro has been at its highest after the significant decrease of new coronavirus cases in the EU.

With the continued uncertainty due to the coronavirus pandemic and the ongoing Brexit negotiations, the Euro will remain sensitive. But let’s see what the main drivers of the euro in the coming months are.

Key Drivers of the Euro

Apart from the coronavirus pandemic and Brexit updates, the Euro is sensitive to releases of macroeconomic data including GDP, unemployment rates, manufacturing and services output and consumer price indices which measure the Eurozone economy’s health. Significant events such as meetings of the European Central Bank (ECB) and updates regarding policy on interest rates and fiscal stimulus, can also impact on the single currency. For example, low interest rates are unattractive to investors.

If the US Dollar rises, as the US economy strengthens and interest rates are increased by the Federal Reserve, then this will weigh on the Euro. There are also dangers from weaker global growth and a slowing of the EU member states’ economies, especially the German economy.

Last but not least, if the Chinese economy slows and China’s trade is reduced, then there will be less demand for European imports.

European Commission forecast for the Eurozone economy

In its Spring 2020 Economic Forecast, the European Commission reported that the coronavirus pandemic will have “very severe socio-economic consequences” for the global and EU economies. It has forecast that “the euro area economy will contract by a record 7¾% in 2020 and grow by 6¼% in 2021. The EU economy is forecast to contract by 7½% in 2020 and grow by around 6% in 2021. Growth projections for the EU and euro area have been revised down by around nine percentage points compared to the Autumn 2019 Economic Forecast.”

Paolo Gentiloni, European Commissioner for the Economy, said: “Europe is experiencing an economic shock without precedent since the Great Depression. Both the depth of the recession and the strength of recovery will be uneven, conditioned by the speed at which lockdowns can be lifted, the importance of services like tourism in each economy and by each country's financial resources. Such divergence poses a threat to the single market and the euro area - yet it can be mitigated through decisive, joint European action. We must rise to this challenge.”

Economists’ Predictions in the near- and long-term

According to Citibank, “Second waves of crisis, trade wars and the ECB’s future reaction will likely keep EUR soft near term and upside capped medium term despite a lot of bad news in the price.”

In the long-term, analysts at CIBC expect the Euro to rise: “While euro sentiment remains compromised by the lack of political coherence, we’ve seen the ECB taking action by expanding its balance sheet. However, that move has been dwarfed by the additional supply of USD currently being injected into the market, which remains supportive for the EUR/USD pair.” They added that positive fund flows as a result of the Eurozone current account surplus will benefit the euro, despite political uncertainty.

Natixis Research expects Eurozone inflation to return in 2021 due to the “decline in productivity and the increase in unit production costs due to the new health standards taken because of the coronavirus pandemic.” In turn, the increase in inflation will lead to a rise in long-term interest rates which will support the euro.

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