2017 has turned out to be a mixed bag for the pound against the Euro. The shoots of recovery were present in Spring, when Sterling traded at its highest since December, within touching distance of post EU referendum highs. Despite continued strength against the US dollar, the pound has since struggled against its European counterpart. Moving into the latter stages of 2017, however, is this about to change?
With Sterling trading as much as 2% off its 2017 lows, is it time to start asking if Sterling has bottomed against the Euro? Furthermore, is there a chance that we will return to pre-Brexit levels in the future? This report will dig deeper into important upcoming events that could provide direction for Sterling/Euro.
Central banks are likely to play a key role in foreign exchange markets for the remainder of 2017. In particular, the European Central Bank (ECB) will be closely watched this Autumn as the Euro trades at an almost 3-year highs against the US dollar and an 8-year high against Sterling, when excluding October 2016’s ‘flash crash’. Policymakers at the ECB are concerned that Euro strength is hurting exporters in the region, most notably in Germany, while also depressing all-important inflation.
However, the ECB is also contemplating ending its Quantitative Easing (QE) programme, a key dovish policy, which would likely push the Euro higher. But with Euro strength dragging on inflation, will the ECB choose to delay its taper – or even slow rate of the taper – in order to dampen the strong Euro?
Brexit will dominate the airwaves as Britain and the European Union’s negotiations continue. While neither side has yet compromised on the UK’s eventual leaving bill – and the UK government hoping to speed up talks – a ‘major Brexit speech’ by Theresa May has been scheduled for 21 September. Could this be a leaving bill concession, needed to keep the talks moving? If so, the quick progression of talks is likely to help the case of Sterling. Anything likely to delay agreement would have the opposite effect.
The final major European election of the year, the German federal election, takes place on 24 September. Whilst incumbent Chancellor Angela Merkel holds a healthy lead over her main challenger, Martin Schulz of the SPD, the smaller parties may hold the key to the election. Merkel currently leads a ‘grand coalition’ alongside Schulz, however, should the minor parties from the centre perform strongly, Merkel could gain more authority in a new coalition. On the other hand, a surprising late momentum swing for Schulz may even spoil Merkel’s procession. The Euro would likely favour the former.
Finally, an unusual scenario that may arise is the possibility that a crisis in the UK sparks a fresh leadership race for Number 10. Since June’s snap election, in which Theresa May lost her outright parliamentary majority, her position has been continually questioned. Despite managing to defend herself against rumoured leadership bids from Amber Rudd, Boris Johnson and David Davis, the tragic Grenfell disaster put the PM back on shaky ground. Despite her insistence that she will stay to fight the next general election (sometime before 2022) others in her party are less certain. Could another crisis spark a vote of no confidence and subsequently see a third PM installed since 2016’s EU referendum?
Read on to find out what forecasts City of London analysts are making for Sterling against the Euro and how you can protect your FX transactions against further currency fluctuations.
