The latest UK economic reports have been surprisingly upbeat, but the Pound Euro exchange rate has still fallen to fresh multi-month lows so far in 2017 and, according to some analysts, this is a big concern.
Why? Because it indicates that Sterling is likely to continue spiralling lower even if the UK economy continues displaying strength in the months ahead. Projections that GBP EUR could hit parity in 2017 may even be realised, although that does also depend on the outcome of the upcoming European elections.
GBP EUR Drops to 1.14 as Brexit Speculation Intensifies & Article 50 Looms
The Pound Euro exchange rate hit a new low of 1.1404 on Tuesday as conflicting commentary surrounding the government’s stance on retaining access to the European Union’s single market and GBP shorting sent Sterling lower.
Since the UK’s decision to Brexit from the EU, the Pound has become decoupled from domestic data to a certain extent, and reports showing an unexpected level of resilience in the UK economy at the close of 2016 have done little to lend Sterling support, especially as Theresa May’s recent remarks have led many to believe the government won’t be prioritising single market access in their Brexit negotiations.
According to Head Trader Adam Solomon; ‘It’s been the same story against all of the 16 most actively traded currencies, with the Pound struggling to find support in an environment of high risk. The perception that the government will focus on immigration controls rather than prioritising a free trade deal with the EU is scaring investors, amid expectations that a lack of free trade would have a devastating effect on the UK economy. Since the start of the New Year, we have seen positive reports on manufacturing, services and retail sales growth for the fourth quarter with GDP expected to expand at a faster pace through to December.
Yet, the Pound hasn’t seen any benefit from the positive tone to macro-economic data and that’s a big concern. What should go up and doesn’t go up, can only go down.’
With the activation of Article 50 still currently set to take place in March, it’s possible that the Pound Euro exchange rate could still have further to fall.
Difficult to Call Pound / Euro Forecast in 2017 with European Elections Ahead
Although the Pound recovered from its worst levels against the Euro before the close of European trading on Tuesday, the currency is still in a precarious position. The Pound US Dollar exchange rate has also been struggling under the weight of Brexit uncertainty.
Solomon believes that we could see GBP USD slide below 1.20 in the near future.
He commented; ‘Theresa May made her statement over the weekend and the Pound has succumbed to widespread selling pressure since. The GBP/USD exchange rate has been testing post referendum lows and it is quite conceivable that we see a drop below the 1.20 level over the coming weeks to fresh 31-year lows, especially with the Fed expected to raise interest rates on 2-3 occasions this year.
The GBP EUR rate is more difficult to call with the big elections coming later this year in France and Germany and the market will be wary of another anti-establishment result. In the immediate future, we are bracing for the Supreme Court decision this month and a lot hinges on whether the result will support the government’s appeal and that would make “Hard” Brexit that bit more likely.
Theresa May was speaking again yesterday and said that the UK will need a completely new trading relationship with the EU after its withdrawal. The Pound fell again on concerns the government is planning to pull the country out of the single market and May attempted to blame the media for downward move in trying to interpret her thinking. In her defence, her comments over the weekend were hardly news. She was banging the same drum on immigration that she has been saying for months. The move in the market reflects the level of uncertainty and angst over what hard Brexit would mean to the UK.’
Will the Supreme Court Decision Help the GBP EUR Exchange Rate Recover?
The headwinds facing the Pound Euro exchange rate may be strong at the moment, but there is still scope for GBP EUR to stage a recovery in the short-term.
While the Supreme Court met to discuss whether the activation of Article 50 needs to be ratified by Parliament back in December, the decision is yet to be known. The outcome of this appeal could make all the difference to Pound Euro trading.
As Solomon asserted; ‘If the Supreme Court veto’s the appeal and supports the High Court decision granting parliamentary approval on any Brexit deal, the Pound could find some near-term relief.’
On Wednesday the Pound Euro exchange rate had returned to trending just below the 1.15 level despite UK manufacturing and industrial production figures exceeding forecasts.
Year-on-Year manufacturing production improved from -0.5% to 1.2% while industrial production rebounded from -1.1% to 2.1%.
According to Reuters; ‘The large increase in industrial output in November largely reflected the reopening of the Buzzard oilfield in the North Sea – responsible for around a tenth of Britain’s oil output – and an increase in the volatile pharmaceuticals sector.’