The euro is currently experiencing fresh 2-month lows against sterling and 3-month lows against the US dollar.
|Currency Pair||% Change in 1 month||Difference on £200,000|
The GBP/EUR pairing is currently trading comfortably between buoyancy levels of 1.10 and 1.15 for much of the year and against the greenback, the pairing is fluctuating around the 1.15 level, around 8 cents from where the market had been back in April.
There is reason to suggest much of the recent EUR weakness has been influenced by the growing concerns surrounding the Italian economy, which has national debt of 130%, more than double the figure set by EU guidelines (60%) and has over the last few years benefitted from incredibly low interest rates as a consequence of the European Central Banks (ECB) Quantitative Easing programme (QE), which is set to be scaled back towards the end of the year.
Italy is the Eurozone’s 3rd largest economy and the fact that the country's budget has deviated so far from EU rules has fuelled concerns that the problem could spread across the bloc and increase pressure on the single currency.
Despite recent suggestions that an exit deal is still achievable before the end of the year, EU Chief negotiator Michel Barnier has once again reiterated that a potential deal is only achievable if a solution can be resolved over how the Irish border will operate after the March exit date.
It is understood that both sides have agreed there should be a temporary “backstop” arrangement to avoid border checks between Northern Ireland and the Republic, until a new trade deal solves the issue.
This would come into effect after the post-exit transition period ends, but both sides currently disagree on its terms, and the issue is holding up the rest of the Brexit talks.
A ‘no-deal’ exit scenario is viewed as potentially damaging because tariffs, customs and new regulation could severely disrupt trade between the associated economies. Markets have responded accordingly.
Suggestions of potential deals have generally seen GBP gain ground against the EUR, as Brexit uncertainty has been temporarily eased and investor focus then turns to alternative market influences, such as external trade pressures on the Eurozone and the internal political & economic concerns surrounding its various member states, such as Italy.
Wednesday will provide Markit PMI (Purchasing Managers Index) industry data for Germany, France and the bloc as a whole, so indications of expansions in these areas could see favourable EUR movement.
The European Central Bank will also announce their next interest rate decision on Thursday, which will be followed by President Mario Draghi’s monetary policy statement.
Interest rates are expected to remain on hold so this has the potential to be a ‘non-event’, however if Mr Draghi indicates that a potential hike could be on the cards in the short-medium term, this could cause a spike in EUR sentiment.
Clients looking to sell EUR could benefit by considering their positions sooner rather than later, as the potential for short term gains could be outweighed by the potential for much heavier losses.
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