GBPEUR rates have swung a lot recently, with 6-month highs reached only 2 weeks ago and also re-visiting the 18 month low 4 weeks ago. In recent times Brexit has been the major driver for this pairing however the undertone of European weakness has started to have a larger impact recently.
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To highlight the recent uncertainty in, Italy is now in a recession, Germany is close to falling into a recession and ongoing trade talks between Europe and the US have also set off alarm bells. The slowdown in Europe has recently been highlighted in a steep fall in sales across the car manufacturing industry which is a massive contributor to Germany.
There has been a confirmed slowdown in demand from China, a fundamental change in consumers’ settlement away from diesel cars and an uncertain future around electronic cars. On top of that, a threat from the US that they could impose a 25% tariff on European cars and you can understand why many are wary around the euro’s future. This is all on top of the background economic picture of Europe looking strained.
Inside the European Central Bank (ECB) there are also challenges whereby their current QE project is coming to an end when debt levels are reaching record highs, as indebted countries are lending money to other indebted members of the EU. The leader of the ECB Mario Draghi, is set to leave in October so seems somewhat tongue tied in giving real insight into the bank’s plans after that date and no real front runners for his replacement.
There are a number of political topics across Europe which are equally set to have an impact on the euro’s value going forward.
In Italy they are still at logger heads trying to get an acceptable budget through Brussels, the leading party there got into power promising reform which is in real terms is being rejected by Brussels. France now is in its 15th week of weekend protests by the gilets jaunes and continuing unpopularity of Marcon. Something that started as protests on tax costs climbing has evolved to an anti-establishment movement against the leading Government which recently got the lowest poll readings in recent time at this stage of tenure. In Germany, Angela Merkel, who is handing over control of the leading Government party in December, is posturing to stay on as chancellor despite previously saying the role of party leader and Chancellor go hand-in-hand. And in Spain's recent 2019 budget was rejected and a snap election has previously been promised by the leading government there if it failed, a snap election could be called as soon as today for 2 months' time.
As you can see there is a lot of internal politics and strains happening within member states when they are also trying to project a unified front to support the 'dream of the EU' when the UK is negating to leave. Lots of topics which could have an impact moving forward so make sure to inform your broker here if you are currently in the market.
Recently the European Union amended its expectations for growth in Italy’s for 2019 to 0.2%, which would be its lowest level in five years. Retail sales in the euro area fell in December, in Germany it fell at its sharpest rate in 11 years and yesterday the latest European GDP figures were released and showed an expansion of 0.2% as expected.
Later today European Trade data is released and is expected to show further worries, meaning the euro could end the week weaker than it is currently. Next week Construction data is released on Tuesday, key PMI data on Thursday and consumer data on Friday.
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