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A November Surprise for the GBP/EUR Currency Pair?

GBP
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November 9, 2016 By: , No Comments

The GBP/EUR currency pair is at 1.124, up 0.07% or €0.0008. The 5-day performance of the pair shows an appreciation of the sterling to the tune of 0.08%. Over the past 1 month, the pound has gained 1.02% against the euro. The UK interest rate is a major driver of GBP strength or weakness. When the MPC of the Bank of England decided to hold the bank rates steady at 0.25%, this helped to stabilise the sterling. A stronger GBP would invariably hurt the UKs ability to compete on the international stage. The BOE has maintained asset purchases of £435 billion as it attempts to hit its 2% inflation figure. The unanimous decision to continue current quantitative easing on 3 November 2016 is important. The solidarity among Monetary Policy Committee (MPC) members is meant as a show of strength as the UK navigates a potentially difficult Brexit.

Strong performance of the GBP in November expected to continue

This week is one of the most important and defining weeks in years. The US presidential elections, while not directly impacting on the GBP/EUR pair, has global ramifications. A Trump victory is associated with unknowns, while a Clinton victory returns markets to the status quo and brings a modicum of stability to the global economy. For the GBP/EUR pair, the issues are mainly Brexit-related. The British High Court recently put a spoke in Prime Minister Theresa May’s agenda by requiring that Parliament hold a vote on invoking Article 50. That alone has helped to strengthen the pound, and it has slowed the march towards a Brexit. With more obstacles ahead, the UK can negotiate a better settlement deal with the EU. The GBP rally is a global trend, not unique to the EUR. The neutrality of the BOE has helped the GBP in its course.

GBP positioned to break to the upside

At the beginning of October, the GBP/EUR currency pair was trading around the 1.15 handle. We may in fact recover to that level in coming days if economic data out of the UK continues to support that trend. Unfortunately for GBP balls, there hasn’t been much to cheer about since late June 2016. The GBP has plunged from approximately 1.30 to the EUR to its current level. This sideways trading range shows a period of consolidation is underway, with a recent break to the upside. From a short-term perspective, the safe money is on a stronger GBP/EUR pair. Analysts are anticipating gains towards the 1.1462 handle, and then closer towards the 55-day MA which is at 1.1470.

The short-term projections for the sterling are much improved, but it is by no means a solid recovery. The fact of the matter is that the UK remains precariously balanced with the Brexit saga. According to BNP Paribas, the GBP is likely to recover strongly against the USD and the EUR. They believe that the Bank of England and its governor Mark Carney are good for the sterling and will drive it stronger. Fortunately, the 2% inflation target will easily be reached with a weak currency. A strong GBP will act as a damper on the FTSE 100 index and make investment in the UK difficult under current circumstances. Given that the EUR is negatively impacted by a stronger USD, the GBP invariably benefits. When the volatility around the US election subsides and the results are in, we will likely see a stronger greenback, a weaker EUR and a stronger GBP/EUR pair.

 

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Brett Chatz

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.

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