Brexit is the big bear that won’t budge

There’s no getting away from it: the key catalyst in any exchange rate movements between the GBPEUR currency pair is Brexit. Positive or negative rhetoric, discussions and decisions as the UK-EU negotiations play out are carving a path for these currency partners, strengthening and weakening Sterling in equal measure. Throw trade tensions between the US and its global counterparts; political uncertainty within Europe; and an uneasy UK parliament into the mix; and you have a perfect storm for currency volatility, of which the Pound and Euro appear to be bearing the brunt in the current market.

Turbulent times for the Euro

The Euro makes up one side of some 34% of FX swap transactions, so, while this pales in comparison to the US Dollar’s 91%, it still makes up a considerable share of the currency markets, and economic performance and political activity in the Eurozone not only affect the strength of the Euro, but can have noticeable effects on other currencies.

Besides Brexit, the European Central Bank’s (ECB) approach to monetary policy is often a market mover – the current cautious attitude is, for the most part, keeping the Euro on the back foot. ECB chief, Mario Draghi, announced that their Asset Purchase Programme (APP) could, if required, extend further beyond the given date of September 2018, and he has been clear that they will extend if circumstances require, however, market commentators are broadly in agreement that the policy will come to an end by the end of 2018. Exporters from the Eurozone have benefitted from Quantitative Easing measures for some time now; a weaker Euro makes exports cheaper, so it will be interesting to see what direction the Euro takes once the EU’s monetary stimulus is ended.

The aftermath of the German and Italian elections are still a concern for the Eurozone and the Euro, and recent economic disappointments from Germany – their major producer – have kept the Euro under pressure.

The Eurozone is still in recovery mode, with a mixed bag of economic data being released and markets considering further troubles for the Euro in the weeks ahead, given the myriad political pressures. 

British Pound still tied to Brexit 

The Pound is staying fairly cool under pressure in the current market, having dipped against the US Dollar and then climbed its way back up again. Sterling strength is all down to any positive Brexit developments, and the Pound remains vulnerable to any shocks from difficult conversations and negative murmurs that filter from the negotiations. Recent weeks have seen some success for Sterling, however, as hopes for a Brexit transition agreement have helped the British currency to climb against a raft of major currencies, including the Euro, USD and Australian Dollar.

The Pound-Euro currency pairing seems to have recovered from the considerable lows seen in 2015, and there could be scope for further upward movement, although outstanding Brexit questions, such as Ireland, still loom over the Pound, and there may still be some ripple effects from the Russian poisoning and the political repercussions, but the initial shock to Sterling seems to have subsided. Trade tensions – between the EU and UK, as well as with the US and Russia, could also have a part to play in the future of this currency pair.

Markets are in a cautious mood, with several key economic and political discussions and announcements on the cards, including the meeting of the G20 finance ministers; the next US Federal Reserve meeting (where it is widely expected that interest rates will be raised); and hopes of a breakthrough in the Brexit negotiations and a transition deal being achieved.

Guidance for buyers

The GBPEUR exchange rate has been in an incredibly narrow trading range since the middle of September and the exchange rate is approaching the top of this range. 1.1450/1.1500 is the area to target in the short term in case of a correction to the bottom of the channel back to 1.1200.

Guidance for sellers

The current trading range has been in place since September 2017, which is encouraging. A sustained break above 1.1500 would be concerning and protection should be left above there. For now, a retest of 1.1200 looks more likely.