GBP/EUR Pair Rallies with Italian Referendum Pending
Forex traders have been going long on the GBP ever since the surprise UK High Court ruling. According to this, Prime Minister Theresa May has to gain Parliamentary backing before invoking Article 50 of the Lisbon Treaty. In recent weeks, we have seen a reversal in the downward trend with the GBP/EUR pair, and traders are shorting the EUR as geopolitical pressures mount. Front and centre is the upcoming Italian referendum.
Central Bank Policy Affecting the GBP/EUR Currency Pair
There are many factors weighing on the strength of the GBP, notably Fed policy in the US. On Wednesday, 14 December 2016, the Fed FOMC will be meeting to discuss the federal funds rate. Currently, the probability of rates rising by 25-basis points is 95%. This is the surest possible sign that a rate hike is imminent, and it has been confirmed by Janet Yellen’s recent remarks.
If the Fed hikes rates, this will strengthen the USD and weaken other currencies trading against the greenback. The rally that we have seen in financial markets has largely been attributed to the Trump phenomenon. With Donald Trump’s election, Wall Street equities have been boosted and the Dow Jones is now at record highs. A rate hike is particularly good news for bank stocks, since they rely on interest-earned income for profitability.
Back in the UK, there is growing concern about what form a Brexit will take. European officials are placing increasing pressure on the UK to push forward with a hard Brexit, but Prime Minister Theresa May is reluctant to expedite the process prior to full consultation at the highest levels. Formal negotiations have yet to be structured in a way that details a clear pathway to a Brexit. The ECB (European Central Bank) and its president Mario Draghi have struck a dovish tone with regards to monetary policy, but this has not helped the GBP/EUR to rally.
European Economy at Risk of Populist Nationalist Politics
Beyond Brexit and central bank policy, is a more pressing concern: The Italian Constitutional Referendum. It comes as no surprise that the GBP will be a beneficiary as the referendum draws closer. The EUR is likely to face a steep sell-off against the greenback, yen and the sterling. Populist nationalism has swept across the United Kingdom and the United States. With upcoming elections in Italy and Austria before the end of 2016, the glue that binds the European Union together may be coming apart at the seams.
In spring of 2017, the French presidential elections will be taking place, and this will be one of the most hotly contested issues in all of Europe. There is growing consensus that the right-wing National front is gaining ground what with all the terrorist bombings throughout France. Even the beleaguered Greek economy is in the spotlight once again. This time around the German Finance Minister has been critical of any efforts to offer debt relief to the overburdened, debt-ridden Greek economy.
Can Chancellor of the Exchequer Hammond Excite Currency Markets?
The future of the GBP/EUR pair is uncertain. However, one of the drivers of speculative sentiment will be the autumn statement delivered by Chancellor of the Exchequer, Philip Hammond. If the UK government adopts a policy of fiscal tightening, this will curtail bullish sentiment for the GBP/EUR pair. It is more than likely that such measures will be put into play given that the UK economy has performed strongly post-Brexit. If austerity measures are shunned, Hammond will be able to inject greater energy into the currency market.
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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.