Thursday, 7 January 2016

Thursday, 7 January 2016

How could the Brexit vote affect GBP/EUR in 2016?

Sterling/Euro rates slid again yesterday, failing to sustain the muted recovery we saw earlier in the week. The exchange rate dropped but encountered ‘support’* at around €1.36, roughly where the pair has been for the last couple of weeks. The reason for yesterday’s fall was better than expected EU PMI (Purchasing Managers Index) figures. It’s an overview of Sales and Employment in the EU and as the number was higher than expected, the Euro gained strength and became more expensive to purchase.

Last night, the Pound fell further against both the Euro and the US Dollar, to €1.3520 and $1.4570 respectively. This was due to trading being suspended in the Chinese Stock markets, which will have a knock-on effect on the FTSE, and as such there is a fear of contagion globally, hence the sell-off for Sterling.

GBP/EUR 24 hour graph

The Brexit issue in my view is going to have a huge destabilising effect on the Pound in the coming months. If you remember when the UK voted on Scottish independence, the uncertainty it created caused the Pound to lose a significant amount of value, causing exchange rates to drop. I think that the risk of a Brexit is a much bigger issue, and nobody has even started to outline the main arguments ‘for’ and ‘against’ as yet. Remember that the Prime Minister has promised to hold an in/out referendum by the end of 2017, however currently there is an expectation of a vote as early as May or June.

The effect of this is impossible to foresee. On the one hand, we could see a significant drop in the value of the Pound as uncertainty gives the markets the jitters and investors dump the Pound. On the other hand, markets may take the early vote as a positive sign that the government want to nip things in the bud nice and early to avoid market uncertainty. Either way, the issue is likely to create lots of volatility for the Sterling/Euro pair in the coming months. So any clients with a requirement to buy or sell Euros should get in touch to discuss their options as soon as possible.

In the short term, the rate has now broken through the support* level of €1.36, and now it’s done so we may expect it to continue to drop further, however if today’s EU unemployment figures disappoint, then we could see this pair bounce back and climb free of this level. (Those needing to sell Euros should note the current level isn’t far off the best it’s been in a year, and 6% better than the latter part of 2015.)

What could move exchange rates today?

For Sterling/Euro, the main releases to look out for are the EU unemployment figures at 10am. If the figure is better than the previous 10.7%, then expect the Euro to gain strength, and vice versa. We also have the EU Monetary Policy Meeting Accounts, which contains an overview of financial market, economic and monetary developments. Any surprises could affect the Euro.

Get in touch to discuss your currency requirement

*Support And Resistance Levels – If the exchange rate doesn’t fall below a certain price, it’s reached a ‘support’ level. It’s because a drop in value has resulted in more buyers than sellers. At this point, traders sweep in and make purchases, creating a floor. The other direction is a resistance level which is when a currency encounters difficulty rising above a specific value, it has then hit resistance. This occurs because the number of sellers outweighs the number of buyers after a currency has experienced a sharp increase in price. Currently GBP/EUR has been hitting support at €1.36 for 2 weeks.

Adam Bobroff, Director
T: 01442 892 060
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