After plummeting from 1.36 to 1.10 over the first half of 2016, the GBP EUR exchange rate recovered to 1.19 before the end of the year. But what can we expect from the pairing in 2017? Will Pound Euro continue its recovery or does it have further to fall?
2016 will likely be remembered as the year which saw the UK vote to leave the EU and Donald Trump become President Elect of the United States. These largely unexpected developments prompted significant turbulence for the Pound to Euro exchange rate, with a difference of roughly 30 cents between its yearly high and low. Although the Pound started recovering from its post-referendum weakness before the close of the year, it nevertheless remained fragile, and the GBP EUR exchange rate is highly vulnerable to further dips in the coming months.
It is unlikely to be plain sailing for the Euro in 2017, however, with concerns over the future of the EU and the Eurozone itself mounting in the face of rising populist sentiment across the continent. With the shifting geopolitical shape of the world expected to remain the primary influence on the currency market for the foreseeable future, what particular events should you be watching out for?
Brexit Factor Expected to Keep Pressure on the Pound (GBP)
The EU referendum was something of a game-changer for Sterling, limiting the currency’s correlation to domestic data and creating strong political headwinds. Naturally, the outlook of the Pound will continue to be defined by the subject of Brexit, with the impact of the leave vote likely to be felt for some considerable time to come. While the GBP EUR exchange rate has suffered some marked losses thanks to the uncertainty that now surrounds the future of the UK economy, there still remains potential for a further decline. The much-anticipated triggering of Article 50, which Prime Minister Theresa May had scheduled for March, looks set to undermine the strength of the Pound as this will officially set the UK on a two-year course to the exit.
As the shape of negotiations unfold, the Pound is likely to move in response, with markets reacting to any indications as to the likely shape of the UK’s future relationship with the EU. If politicians from either side of the Channel are seen to be taking a harder line of rhetoric then the mood could turn increasingly bearish. The question of whether single market access will be retained looks set to be a major cause of market concern. Failure to maintain the passporting rights of the financial sector could also discourage confidence in the domestic economy as the continued health of the City is critical to the UK’s economic future.
On the other hand, if talks appear to be more amenable in nature then the GBP EUR exchange rate could be offered some more sustained support. Even though it seems unlikely that the UK government will be able to secure everything that it wants without compromise, the view of investors looks to be more positive the closer it can get to its current arrangement.
While expectations for the Bank of England (BoE) to cut interest rates to a fresh record low have died back in response to the resilience of post-referendum data, fresh commentary from policymakers is still likely to move markets. Of particular interest will be the Bank’s quarterly Inflation Reports, given that domestic inflationary pressure is forecast to rise sharply as the Pound’s 15% decline filters through into the wider economy and drives up consumer prices. This would encourage further selling of Sterling in the short term, especially as the BoE has indicated that it will not rush to raise interest rates in the event of Brexit-based inflationary pressure.
Euro (EUR) Under Fire from Populist Momentum in French and German Elections
A significant risk event for the Euro, meanwhile, is the upcoming French presidential election, where National Front candidate Marine Le Pen is hoping to perform another populist surprise. While the Republicans’ selection of former Prime Minister François Fillon as their candidate encouraged hopes that the far right will not be make significant inroads, investors now know better than to rule out the dark horse too soon. Confidence in the Euro is thus likely to deteriorate in the run-up to the first round of voting on 23rd April.
Whatever the result of the election, the GBP EUR exchange rate can be expected to see some sharp movements in the days surrounding the vote. While Fillon would be a far less controversial choice than Le Pen, his selection may not be as much of a reprieve to the Euro as markets might hope, and would still have the potential to widen the divisions within the currency union. The Republican candidate is also considered less likely to look upon the UK with favour during Brexit negotiations, as opposed to the Eurosceptic Le Pen.
Later in the year the results of the German federal election could put renewed pressure on the single currency, with investors likely to be disappointed if Chancellor Angela Merkel does not secure another term in post. However, as Merkel’s approval ratings have remained relatively high, despite some backlash against the openness towards refugees fleeing the Syrian conflict, the risk of a major shakeup of the political order appears more limited. Even so, given the events of 2016 a major surprise shouldn’t be ruled out.
With the integrity of the Eurozone still looking strained, despite progress with regards to Greece and its bailout program, any signs of increased division between member states could weigh heavily on the Euro.
Could GBP EUR Exchange Rate Avoid Parity in 2017?
In the immediate aftermath of the UK’s vote to Brexit, the Pound Euro exchange rate recorded considerable losses, and many economists forecast that the pairing could hit parity in 2017.
However, if the Euro does come under the pressure outlined above, and if UK ecostats for the first quarter still point at impressive resilience in the domestic economy, Sterling may manage to avoid hitting parity for at least the first half of the year.