Following Inflation Figures GBP Saw a Temporary Rise against the EURO

Written by Frank Kremer

Recently, the GBP/EURO pair saw a nice new high, trading at 1.925 after earnings and employment data were released in mid-December of 2016. This was largely due to data on those fronts that was better than had been previously forecast, and there was high hopes that the pair could see a further rise but hopes that it would break the 1.20 mark were dashed due to the expectation of a hard Brexit in May. Not only is the Brexit being forecast to be hard, but in the words of newscasters around the globe, it is now looking likely to be a “diamond-hard” leaving and that is not instilling confidence in the pair at this time. Traders are following events closely to see where further developments lead.

December Hopes Lead to January Gloom

What analysts were looking towards was good news from the Bank of England and/or the Federal Reserve in the United States in terms of stimulating those respective economies and employment. If this were to happen, interest in the pair might be stimulated and the hopes had been that it would continue to climb, but December hopes have begun to sink. As of the Pacific market opening on 16 January, the GBP plummeted to a new low for the period of 1.1307 against the EURO and against other major currencies it was trading at:

  • GBP to USD exchange rate at 1.995
  • GBP to NZD exchange rate at 1.6806
  • GBP to AUD exchange rate at 1.6007
  • GBP to ZAR exchange rate at 16.2007

These were current as of Pacific market opening on 16 January, 2017. However, as in the case of the GBP/EURO pair, it all stems on how the economy plays out and whether or not it is stimulated and earnings can continue climbing.

Why the Decline Had Been Expected

With tensions high amidst fears of a hard Brexit, there is also concern in upcoming negotiations on Brexit that Theresa May will draw a red line on the issue of immigration, “Britain is an open and tolerant country. We will always want immigration, especially high-skilled immigration…  But the message from the public before and during the referendum campaign was clear: Brexit must mean control of the number of people who come to Britain from Europe. And that is what we will deliver”. The problem here is that the EU contends that free movement is imperative in their single market and this is their red line. The optimism that even with Brexit the UK would remain part of the single market trade agreement has been driving the GBP until now but will that hold in a hard Brexit?

Amidst these concerns, the red lines having been drawn will most likely signal an end to the current free trade agreement. Remember, one of the key issues in the Brexit referendum was immigration and the trade agreement. What will happen after upcoming talks is anyone’s guess but it looks like the exit may be anything but amicable.

In the End Anything Can Happen

As the result of fears of a very hard Brexit and an end to the free trade agreement, it is being forecast that the GBP/EURO pair will continue to slide as will the GBP against other currencies providing traders with the volatility but also a level of uncertainty for UK and EU businesses which will have an impact on trade for the foreseeable future. If weaker than expected UK inflation data is forthcoming and the BOE and Federal Reserve are unable to significantly stimulate their respective economies, it does not bode well for this pair at this time.

However, even with Theresa May’s solid red line on denying immigration and free movement along with the EU’s insistence that free movement is vital to economic stability, anything could happen. This has been the case time and again and it only takes one trigger to put the pair back on the rise again. All eyes are now on these negotiations.

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Frank Kremer

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