- Sterling (GBP) Exchange Rates Increasingly Volatile – ‘Brexit’ uncertainty weighs heavily on investor confidence
- GBP/EUR Conversion sees Massive Price Swings – Monthly range between lows of 1.26 and highs of 1.32.
- EU Referendum Vote Too Close to Call – Opinion polls increasingly show the vote will be close
- Pound Volatility at Multi-Year Highs – GBP/EUR dropped 10 cents in 2016
Sterling Steady as Construction Output Impresses
Although the UK’s Construction Output report impressed, the Pound was left trending in a narrow range against the Euro during Friday’s European session.
Output was shown to have increased by 2.5% on the month, more than double the expected increase of 1.2%.
The annual figure of -3.7% was also better than the -4.9% projected.
After the data was released GBP/EUR was trending in the region of 1.2785 and the Pound to Euro exchange rate largely remained at that level as the European session continued.
Given the heavy toll of EU referendum concerns on demand for the British currency, even positive UK data sets are failing to lend the Pound much support.
(Previously updated 17:12 10/06/2016)
GBP/EUR Fluctuations Could Be Triggered by UK Inflation Forecast
While EU referendum concerns are having the most notable impact on Pound to Euro exchange rate movement at the moment, tomorrow’s 12 month inflation forecast from the Bank of England (BoE) could also inspire GBP/EUR fluctuations.
Predictions for a slower rate of consumer price gains may weigh on the Pound. However, any significant political developments will be likely to overshadow domestic ecostats.
Investors with an interest in the Pound to Euro exchange rate will also be focusing on the UK’s latest construction output report. A slide in output could drive GBP lower over the course of Friday’s European session.
As it stands, the GBP/EUR exchange rate is trending in the region of 1.2763
(Previously updated 15:54 09/06/2016)
The Pound has experienced violent fluctuations since the start of 2016, with the Pound Sterling to Euro (GBP/EUR) exchange rate dropping by as much as ten cents as a result of uncertainty surrounding the in-out EU referendum.
With just two weeks until the UK votes on whether or not to remain in the European Union, traders have priced in the highest one-month implied volatility since 2009. With massive price-swings making it increasingly difficult to predict Sterling movement, the aftermath of the vote remains equally hard to predict.
Over the past few weeks poll results have alternated between having the ‘Remain’ and ‘Leave’ camps ahead, causing the GBP/EUR exchange rate to fluctuate between 1.32 and 1.26.
Sterling (GBP) Exchange Rate Volatility at its Highest Since Lehman Brothers’ Bankruptcy
Over the past few days alone the UK Pound has been subject to considerable price swings. On Monday Sterling fell by as much as -1.1% after opinion polls suggested that the ‘Leave’ campaign will be victorious on June 23rd.
The following day, however, saw Sterling rise as much as 1.5% in response to a different poll. Not only does this highlight the fickleness of traders, but it also suggests that the vote will be very close.
‘Considering this is the biggest volatility since Lehman Brothers’ bankruptcy, the hedge is still cheap to make if you really think Brexit can happen,’ said Bruno Atlan, a former currency trader. ‘I don’t think Brexit will happen, but hedge funds, corporates and other players are speculating on it.’
With the majority of economists, organisations, businesses and banks suggesting that voting ‘Remain’ is more beneficial to the economy, any sign that ‘Leave’ is taking the lead causes GBP exchange rates to suffer.
Most analysts predict that the initial shock of a ‘Brexit’ will cause the Pound to shed significant value. However, most experts also concede that the impact on the Pound will probably be temporary.
Bank of England (BoE) Governor Mark Carney recently came under scrutiny for making it very clear that the UK would be better voting to remain a member of the European Union. Carney warned that the UK could face a technical recession following a ‘Brexit’ vote.
‘Brexit, to my mind, would have a material impact on growth and inflation. It would be likely to have a negative impact in the short term. I certainly think that would increase the risk of recession.’
Euro (EUR) Exchange Rates Less Impacted by EU Referendum Uncertainty So Far
Although most analysts agree that a ‘Brexit’ is likely to be more damaging to the EU, Eurozone and Euro than the UK and Pound in the long-term, the uncertainty surrounding the vote has not negatively impacted the single currency thus far.
This is perhaps because the Euro is already holding a comparatively weak position as European Central Bank (ECB) President Mario Draghi steams ahead with the massive undertaking of quantitative easing in the Eurozone.
Unlike the Pound, however, there is potential that a ‘Brexit’ would have far more of a long-term detrimental impact, especially due to risk of contagion.
The migrant crisis, mounting debt and failing economies in the Eurozone have certainly caused an uprising of populist political parties, with many member states likely to follow the UK amid growing disillusionment.
‘The real risk is not [Britain] remaining in the EU, it is a leave vote, which could perpetuate the disintegration of the entire European Union,’ said former Belgian Prime Minister Guy Verhofstadt.
Similarly, researchers at the London-based Centre for European Reform said;
‘Brexit would make the narrative of the EU about disintegration, not integration.’
GBP/EUR Exchange Rate Difficult to Forecast as Data Takes a Back Seat
Such has been the impact of the EU referendum on trader focus that domestic data has had a muted impact on the GBP/EUR exchange rate. This is likely to continue even in the aftermath of the vote, given such uncertainty for the UK and Europe’s future irrespective of the outcome.
There are, however, a few predictions that will likely remain unchanged by the vote. The Bank of England (BoE) is unlikely to tighten monetary policy outlook for a considerable time to come, limiting Sterling’s potential for massive gains.
Also very likely is that the European Central Bank will be forced into easing policy still further with Eurozone inflation showing little sign of a swift improvement.
The run up to the referendum vote is likely to see increased GBP/EUR exchange rate volatility, and the aftermath is difficult to predict irrespective of the outcome.
Over the past week alone the Pound Sterling to Euro (GBP/EUR) exchange rate was trading within the range of 1.2659 to 1.2949.