Risk-off Approach in Europe Weighs on the GBP
Over the past 5 trading days, the EUR/GBP currency pair has depreciated by 0.52%. It started on Wednesday, 23 November at 0.8560, and it is now trading at 0.8516. For the year-to-date, the EUR/GBP pair has appreciated by 15.60%. The bulk of the gains have come since the Brexit referendum on June 23, 2016. This pair has traded in a tight range since 15 November when it was at 0.8586. That the GBP is strengthening is indisputable, but the EUR is also weakening at the same time. A strong sell-off of EUR has taken place since 2 November 2016. At that point, €1 traded for £0.9035. Today, that same €1 can be purchased with just £0.8518. For UK businesses and travelers, more euro-denominated goods and services can be consumed with less sterling. However, this does not bode well for the FTSE 100 index. Recall that some 75% of earnings generated by listed companies on the all share index are based overseas. Many of them are in Europe. When earnings are repatriated in euros back to the UK, they are worth significantly less. This is why we are seeing a rising GBP and an attendant falling FTSE 100 index.
It looks like the EUR/GBP pair has found stability in a tight trading range. This is evident in the lack of volatility. There are potential catalysts on either side of the spectrum. In Europe, there is geopolitical uncertainty with the Italian banks, politics in France and Austria. There are also economic concerns such as the Greek debt crisis and the German Finance Minister’s sentiments about not extending leniency towards the central bank in Greece. Across the English Channel, the Brexit issue remains a contentious point. Prime Minister Theresa May cannot unilaterally invoke Article 50 of the Lisbon Treaty without putting the issue to a vote in Parliament. That surprise decision was made by the UK High Court. We have a stalemate of sorts in the offing.
GBP/USD Pair Rallies Despite Stalemate in EUR/GBP
Across the Atlantic, the USD is coming off a bullish wave. It has been running rampant ever since the election of Donald Trump. The GBP/USD pair is holding its own, up 0.66% at 1.2497. Over the past 5 trading days, this pair has appreciated by 0.6%. And, the EUR/USD pair is up 0.30% at 1.0644. Over the past 5 trading days, this pair has gained 0.12%. For the year-to-date, this pair is down 1.96%. Turning our attention back to the GBP/EUR, we see the week low at 1.1673 and the week high at 1.1779. On Monday, 28 November, the GBP surprised forex traders by being the worst performing of the G10 currencies.
There appeared to be no fundamental factors driving the GBP’s weakness, save for the Donald Trump phenomenon. Since Trump’s election, currency traders are expecting a new era of higher inflation to be ushered in. This will likely be brought about by fiscal stimulus in the US. Over the short-term, we can expect the Trump-trade phenomenon to lessen and a gradual easing in the GBP, stocks and gilts for the UK and the US will kick in. For now, it’s all systems go for the GBP/USD pair.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.