Whilst the UK economy has showed signs of stalling following June’s Brexit vote, it would seem as though the Eurozone has been unscathed so far. Whilst economic data from the UK has showed a gradual decline, with rumblings that the UK may be about to enter a mild recession, the Eurozone’s economic data has remained fairly stable, with Germany’s GDP data released this morning for example, coming in better than analysts had previously expected.
As a result of this, we have seen a sharp spike for the Euro against Sterling since the end of June, with the Euro gaining by over 10% in value. The question many of our clients are now asking us is whether or not this negative trend for the Pound vs. Euro is set to continue? In my opinion, I believe that there is still room for the Euro to make further gains in the short-term whilst the effect of the Brexit vote is still creating uncertainty and a drag on economic data. However, exchange rates don’t move in a straight line, and I believe that there are risks to the Eurozone economy that could harm the Euro in the longer-term.
For example, despite interest rates within the Eurozone at 0% and $80bn per month being pumped in to the economy in an attempt to boost growth, inflation is still way below the ECB’s target of 2% and is not expected to reach it until 2019. How much room is there for Mario Draghi to intervene if inflation fails to show signs of reaching their target? They may be forced to take drastic measures and as a result this could create a curveball as far as the single currency is concerned.
There are also growing fears of the strength of the Italian banking system, after their third largest bank, Banca Monte dei Paschi di Siena, emerged as the weakest out of all European banks following the recent stress-testing at the end of July. It revealed that the bank would collapse if the global economy came under strain, which would have an extremely detrimental impact on the value of the Euro.
With this in mind, if you are currently holding on to Euros and waiting for the best time to transfer them in to Sterling, although I believe there are potentially more gains for you in the near-term; we are currently seeing the best opportunity to sell Euros in three years. This in my opinion is an opportunity not to be sniffed at, so get in touch with one of our brokers to find out how you can take advantage of it.
If you have any questions about todays report, or exchange rates in general, dont hesitate in calling our team on 01494 725 353. We are open until 5pm today to take your call.
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