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Since the UK’s decision to Brexit on June 23rd we’ve seen some pretty dramatic movement in the currency markets, but how is the Pound Euro exchange rate likely to perform for the rest of the year, and could GBP/EUR drop to parity in 2017?
Some economists have asserted that the post-Brexit downtrend in the Pound Euro exchange rate will continue over the rest of 2016 and into 2017, with the pairing eventually moving below the 2008 record low of 1.02 to hit parity. Others, however, have been less pessimistic and cite the recent GBP resilience as reason to bet the GBP EUR pairing is likely to remain comparatively stable near-term.
Pound Euro Exchange Rate at Best Level of 1.31 before UK Brexit Vote
The Pound Euro exchange rate began 2016 trending in the region of 1.36, but speculation surrounding the UK’s impending EU referendum saw Sterling steadily decline over the next six months.
Boris Johnson’s surprising decision to back the ‘Leave’ campaign in February put the Pound under additional pressure. However, by mid-June polls indicated that the ‘Remain’ camp would emerge victorious and confidence in a remain outcome was such that GBP/EUR pushed back to 1.31 on the eve of the results.
But, as history has shown, the UK actually voted to leave the European Union, and that unexpected outcome immediately drove the Pound Euro exchange rate to 1.16 – down 15 cents.
This represents the difference of €15,000 on a £100,000 currency transfer.
Since then the GBP/EUR currency pair has hit fresh multi-year lows of 1.14, but with post-Brexit data proving more positive than expected and economists envisaging an expansion of stimulus from the European Central Bank (ECB), is the Pound likely to fall further?
Over the course of September the Pound Euro exchange rate firmed moderately to trend between the levels of 1.17 – 1.19. While the pairing did hit the 1.20 level, it failed to breach technical resistance. The Pound also recovered slightly from its worst levels against the US Dollar, although the prospect of a US interest rate hike in 2016 prevented GBP from moving too far away from its recent over 30 year low.
Parity Forecast for GBP EUR Exchange Rate
In the aftermath of the EU referendum, financial markets were plunged into temporary chaos and economists projected that the UK would swiftly enter recession – circumstances not conducive to Pound Euro exchange rate strength.
Many industry experts went so far as to predict parity for the GBP EUR currency pair, meaning one Pound would be worth one Euro.
Economist David Meier stated; ‘We believe that weakness will extend gradually beyond the first shock reaction, as the fundamental data will continuously turn Pound negative.’
He went on to comment that it wouldn’t be surprising if Pound Euro hit parity within the next 12 months.
While the drop in Sterling would have a negative impact on exporters and UK travellers, it wouldn’t necessarily be wholly bad news.
HSBC currency strategist Daragh Maher commented; ‘The parity level would make the UK more attractive to foreign investors.’ And increased foreign investment may well help the UK weather the post-Brexit fallout.
Data has already indicated that the softer Pound has had a positive impact on UK inflation and the nation’s trade deficit. While there are concerns that the GBP weakness could see inflation accelerate substantially over the next 12 months, the rate of consumer price pressures has run below the Bank of England’s (BoE) 2% target for so long that the current uptick in CPI is being viewed as a positive thing – as long as average earnings continue rising.
In August the rate of consumer price pressures was expected to come in at 0.4% on the month and 0.7% on the year, following figures of -0.1% and 0.6% in July.
After the July data was published analyst Samuel Tombs noted; ‘Sterling’s sharp depreciation will have its peak impact on inflation mid-way through 2017. Most inflation forecasts usually underestimate sterling’s impact and put too much weight on labour market slack.’
The website Long Forecast offers the following Pound Euro projections for the months ahead;
The forecast for beginning of October 1.16. Maximum rate 1.16, while minimum 1.11. Averaged rate for month 1.14. The exchange rate at the end 1.13, change for October -2.59%.
The forecast for beginning of November 1.13. Maximum rate 1.17, while minimum 1.13. Averaged rate for month 1.15. The exchange rate at the end 1.15, change for November 1.77%.
The forecast for beginning of December 1.15. Maximum rate 1.18, while minimum 1.14. Averaged rate for month 1.16. The exchange rate at the end 1.16, change for December 0.87%.
The forecast for beginning of January 1.16. Maximum rate 1.16, while minimum 1.12. Averaged rate for month 1.15. The exchange rate at the end 1.14, change for January -1.72%.
The forecast for beginning of February 1.14. Maximum rate 1.14, while minimum 1.09. Averaged rate for month 1.12. The exchange rate at the end 1.11, change for February -2.63%.
The forecast for beginning of March 1.11. Maximum rate 1.11, while minimum 1.06. Averaged rate for month 1.09. The exchange rate at the end 1.08, change for March -2.70%.
The forecast for beginning of April 1.08. Maximum rate 1.08, while minimum 1.03. Averaged rate for month 1.06. The exchange rate at the end 1.05, change for April -2.78%.
The forecast for beginning of May 1.05. Maximum rate 1.09, while minimum 1.05. Averaged rate for month 1.07. The exchange rate at the end 1.07, change for May 1.90%.
The forecast for beginning of June 1.07. Maximum rate 1.12, while minimum 1.07. Averaged rate for month 1.09. The exchange rate at the end 1.10, change for June 2.80%.
The forecast for beginning of July 1.10. Maximum rate 1.11, while minimum 1.07. Averaged rate for month 1.09. The exchange rate at the end 1.09, change for July -0.91%.’
Pound Euro Currency Pair Firmer, But BoE, ECB Stimulus Prospects Dampen Forecasts
But is Pound Euro exchange rate parity really likely?
As stated by The Independent; ‘While Euro-Sterling parity may already have arrived for British tourists, in the wholesale market it would require a more than 13% drop in the Pound. Options prices imply only a 32% chance of this happening within two years, while the median estimate in a Bloomberg strategist survey is for [the Pound] to strengthen to 83 pence per Euro by the end of 2017.’
Although data for July showed quite clearly that the UK experienced a fairly dramatic slump following the UK’s decision to Brexit, ecostats for August have been more encouraging and hopes the UK may manage to avoid recession saw the Pound Euro exchange rate strengthen to 1.20 in September.
The Bank of England (BoE) launched aggressive stimulus measures in August in an attempt to defend the UK economy from emerging headwinds, but if UK data continues impressing the central bank may hold off introducing further measures until 2017. In such circumstances the Pound’s recovery against the Euro could continue – particularly as economists are predicting an expansion in stimulus from the European Central Bank (ECB).
As long as the BoE adopts a dovish rhetoric and hints at the prospect of interest rates being cut further, Pound strength is likely to be restrained. However, if the ECB does indeed take action before the end of 2016, we may see the GBP EUR exchange rate creep higher.
Does the Pound Euro Exchange Rate Have the Potential to Hit 1.25?
In September the Pound Euro exchange rate was struggling to hold above the key resistance level of 1.20. However, if that level is breached and UK PMIs for September continue August’s positive trend, GBP EUR could climb. Gains could be greater if the BoE adopts a less cautious tone and reduces the current threat of further reductions to the benchmark interest rate.
An increase in interest rates in the US would also drive the US Dollar higher, putting the Euro under significant strain by default and potentially aiding a GBP EUR rally.
However, even if the Pound Euro exchange rate could hit the dizzy highs of 1.25, any gains are unlikely to be held once the UK finally enacts Article 50 unless investors are positively surprised by the deal the UK manages to secure.
The short-term outlook for the pairing remains neutral-negative but the long-term outlook is far less clear cut.
When attempting to determine how GBP EUR exchange rates are likely to perform, there are a number of key things to focus on.
UK: PMIs, GDP, Employment and Retail Sales data, BoE interest rate decisions/commentary – Poor data or hints that interest rates will be cut again would be POUND NEGATIVE, the reverse would be POUND POSITIVE
Eurozone: ECB interest rate decisions/commentary – if the odds of the central bank revising its stimulus measures increase it would be EURO NEGATIVE but positive for GBP EUR.
US: Federal Reserve interest rate decisions/commentary – A rate hike from the FOMC would be US DOLLAR POSITIVE and EURO NEGATIVE, and would likely boost GBP EUR.
Historical Pound Euro Exchange Rates
2007 – GBP EUR High: 1.52 GBP EUR Low: 1.36
2008 – GBP EUR High: 1.28 GBP EUR Low: 1.02
2009 – GBP EUR High: 1.17 GBP EUR Low: 1.08
2010 – GBP EUR High: 1.21 GBP EUR Low: 1.10
2011 – GBP EUR High: 1.19 GBP EUR Low: 1.10
2012 – GBP EUR High: 1.27 GBP EUR Low: 1.18
2013 – GBP EUR High: 1.20 GBP EUR Low: 1.15
2014 – GBP EUR High: 1.27 GBP EUR Low: 1.19
2015 – GBP EUR High: 1.43 GBP EUR Low: 1.28
2016 – GBP EUR High: 1.36 GBP EUR Low: 1.14