The euro saw its value artificially inflated of late, due to the current negativity surrounding the UK economy and ultimately the pound.
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The GBP/EUR interbank rate dipped towards 1.11 earlier this week, and whilst the pound managed to find a level of support against its EUR counterpart, it has failed to make any inroads back to, or above 1.12.
With the UK economy likely to show economic contraction for the first time in almost a decade, EUR sellers will be lifted by the fact that the markets seem to be viewing the current economic downturn inside the Eurozone as the lesser of the two evils at present.
The EUR also received a boost in support yesterday following the latest Eurozone Services PMI data, which came out above the markets predicted result. The official figure of 55.8 was also an improvement on last month’s figure and will likely help relieve some of the pressure that has been growing on the single bloc. This negative outlook was accelerated following the European Central Bank’s (ECB) last policy meeting, when they indicated the potential need for further monetary stimulus.
ECB President Mario Draghi is likely to remain dovish in his stance, as has become his mantra over his tenure. There was, however, a direct correlation between his latest comments about the need to potentially cut interest rates and reintroduce the central banks Quantitative Easing (QE scheme), and a dip in the EUR value at the time.
This drop against the pound was relatively short-lived, and the EUR is now trading close to a six-month high against GBP. Whether these levels are sustainable could be potentially linked to any prospective progress the UK makes with Brexit talks ahead of its revised exit deadline in October.
Brexit is not likely to be the only contributing factor, with Bank of England (BoE) governor Mark Carney sending a perilous waning about how the current trade wars between the US, China and the Eurozone, could end up having a devastating effect on the global economy, and cause almost a complete stagnation in global growth.
These chilling words would likely send shivers through the single bloc, due to the Eurozone economies heavy reliance on global growth and will heed as a warning to potential investors.
In truth, the current uncertainty and dovish outlook for the Eurozone economy indicated potentially challenging times ahead.
In the short-term investors will be looking at today’s Eurozone Retail Sales figures and with an improvement on last month’s figures anticipated, the EUR could continue to hold its interbank position below 1.12 against GBP as we head towards the weekend.
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