The single currency has been gaining in value against both the Pound and the USD over the last 30 days. Demand has been climbing for the Euro as investors move money out of the UK with its unsure future following the referendum, and out of the USD in anticipation for the election later this year.
The economic health of the EU however still remains under threat. The European Central Bank (ECB) has been adding stimulus for over 18 months now and many member state’s economies remain stagnating or are failing.
Many analysts expect the ECB to increase or extend stimulus at its September meeting despite signs that the economy was not as badly hit by the Brexit vote as previously feared.
Data due this week will be important and could easily impact the ECB’s decision with key economic released due from both France and Germany. Purchasing manager’s indexes were released yesterday morning and showed small contractions. However it is German GDP figures released this morning which will have the biggest impact on currency markets today and forecasts for the next ECB decision.
The forecast is for an improvement to be seen in Germany resulting in some Euro strength making it more expensive to buy. This could dampen the amount of information that is given by the ECB next month however many expect their Stimulus package to be extended for a further 6 months taking them into September 2017.
There is an argument to suggest that GBP/EUR levels may well have reached their bottom levels. Moving forward the suggestion is that UK data will start to improve in comparison to the fall-out of the referendum. Yes the UK economy and Pounds value remain under threat with a potential recession expected in 2017, but the pro-active policies introduced by the Bank of England could result in no recession at all. Equally events elsewhere in the world could weaken the Euro.
The EURUSD is the most traded currency globally so what happens to one impacts the other. With one of the wildest election campaigns and presidential candidates in some time, a run on the USD if Trump was to be triumphant in his campaign could well weaken the Euros value.
Political instability across Europe could equally weaken the single currency. Germany and France both have elections races in 2017 and in a similar way the political uncertainty in the UK weakened the Pound, these events could weaken the Euro.
Nearer term watch out for the potential Italian election – Italian Prime Minister Matteo Renzi stated on Sunday that Italian’s will vote in a new general election in 2018 no matter how a referendum on constitutional reforms turns out later this year.
It is the risk of the rise of far right government, like the UK’s UKIP party, which is the topic to watch. If we see further referendums on EU membership come from the fall-out of the financial crises and refugee crises like that in the UK – the framework of the EU could be very different indeed in 18 months’ time.
Personally I think the above worries are far away and unlikely to materialise however the risks will be accounted for in the currency market. As a result GBP/EUR rates up towards 1.19-1.20 before the end of the year could easily become a reality.
For more information on how future political and economic events could impact your currency requirements, our traders are open until 6pm to take your call on 01494 725 353.
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