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What is the Likely Direction of EUR and GBP Pair

Forex rates are fickle, and subject to whipsaw pricing at any given time. The EUR/GBP currency pair is a case in point. On June 23, 2016, Britons voted for Brexit, gaining a slight majority over their opponents. In the years since, Labour and Tory party members have battled tooth and nail to come to consensus about the best path for Brexit. Prime Minister Boris Johnson’s determination to force early elections on December 12, 2019 paid dividends.

The Tories secured 43.6% of the vote, compared to Labour’s 32.2%. Based on the figures, the Conservatives now hold 365 seats, Labour holds 203 seats, the Scottish National Party has 48 seats, and Liberal Democrats have 11 seats. The other parties make up the difference. The UK Parliamentary elections provided impetus to speculators seeking to go long on the GBP, given the clear pathway to Brexit consensus in Parliament.

67.3% of the electorate turned out to vote, slightly down (-1.5%) from the 2017 elections but nonetheless significant. Amid a flurry of economic indicators expected to be released in coming weeks, the EUR/GBP pair will likely reflect sentiment in the financial markets. Among the many economic reports slated for release include the Bank of England (BoE) expectations, and other important economic data. These reports include retail sales, CPI (consumer price index), and November GDP (gross domestic product).

Naturally, the euro will move in accordance with data and comments from the European Central Bank (ECB) president, Christine Lagarde. In contrast to her predecessors, Jean-Claude Trishet, and Mario Draghi, Lagarde has a unique style of communicating with the public. She has adopted neither hawk, nor dove status – she considers herself an owl. A month ago, she continued the policies of her predecessor, Mario Draghi by leaving policy and interest rates unchanged.

Challenges Facing EU and UK Economies 

 Europe continues to struggle with a cornucopia of challenges, not least of which are public debt. It is cheaper for European governments to borrow money, courtesy of accommodative monetary policy. Despite the low costs of borrowing, which serve to weaken the EUR relative to other currencies, there has been precious little talk of implementing necessary solutions for structural problems and European fiscal imbalances.

The Europeans are faced with a dilemma: complementing accommodative monetary policy with fiscal policy to drive aggregate demand, in pursuit of an acceptable inflation target and full employment. This is an insuperable challenge which is further complicated by ongoing Brexit negotiations with the United Kingdom. The following European economic indicators (Germany, Italy, Spain, Netherlands, France) are expected in coming weeks:

  • Germany – Full Year GDP growth 2019, Wednesday, January 15, expected 0.5%
  • Germany – ZEW economic sentiment index for January on January 21, forecast at 5
  • Germany – Ifo Business Climate January forecast at 96.7 on January 27
  • Germany – GfK consumer confidence for February, on January 29, forecast at 9.5
  • France – GDP growth quarter on quarter, preliminary Q4 on January 31, forecast at 0.2%
  • Spain – GDP growth rate QoQ, FlashQ4 (0.3% est.) & YoY Flash Q4 (1.8% est.) on January 31

 Across the English Channel, the EUR GBP pair is impacted by several important economic indicators such as GDP growth, CPI inflation, Labour Market stats, retail sales, household expenditure, GfK consumer confidence, index of production, Halifax House Price Index, and public sector expenditure and UK debt. The UK economic calendar features an array of upcoming announcements over the coming weeks, notably the following:

  • UK inflation rate year-on-year for December on Wednesday, 15 January, with a forecast of 1.5%
  • Claimant Count Change for December with a forecast of 26,000
  • Bank of England interest rate decision on Thursday, 30 January with a forecast of 0.75%.
  • GfK consumer confidence for January on Thursday, 30 January, with a forecast of -14

The strength of the EUR GBP pair and buying/selling activity thereof will be reflected in the following ways: if expectations are met or exceeded bullish sentiment will ensue. If expectations fall short of actual performance, bearish sentiment will arise. The GBP EUR price movements on Plus500 moved marginally higher for the week ending on Friday, 10 January 2020, and the EUR/GBP pair was hovering around 0.8510 heading into the new week. Over the past 1 month, the EUR/GBP pair has moved slightly lower (-0.07%), briefly falling after the UK election. The currency pair certainly stabilised in recent weeks as lawmakers continue the process of crafting a plan for Brexit.

The technical indicators reflect a buy rating for the EUR/GBP, and the pair is certainly a lot less volatile than other EUR or GBP-related pairs. Given that the British and European economies are so closely intertwined, and there is a tremendous degree of interdependence, both central banks are highly sensitive to one another and tend to act cautiously to avoid a disruptive effect on trading activity. For now, geopolitical tensions vis-a-vis the US and Iran have subsided and will likely not be a factor on the performance of this particular currency pair

 

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