Of Bulls and Bears: Investing in the GBP/EUR Pair
Present and Future Prospects for the GBP/EUR Pair
The GBP/EUR currency pair is trading at 1.1726, down 1.1817% or €0.0140. The pair is 13.54% lower for the year-to-date, but it’s 3-month performance is sharply improved at -6.74%. Over the past 1 month, the GBP/EUR currency pair has appreciated by 1.50% and over the past 5 days, it is down -1.70%. JPMorgan currency analysts expect that the sterling will fall against the EUR over the next 1 year, but the declines will not be as sharp as was initially forecast after the Brexit vote. Limited economic relief will be made available via the Bank of England which is likely to adopt additional quantitative easing measures at its upcoming Monetary Policy Committee Meeting.
Disappointing Inflation Data at 0.6% Caps GBP/EUR Gains
The inflation rate in the UK has held steady at 0.6% for the year through August 2016. This figure is unchanged from July, despite analyst anticipating a gain of 0.7% owing to a weak GBP. Inflation is made up of the following weighted basket of goods in the UK: transport 16.2%, electricity, water and gas and fuels at 14.4%, culture and recreation at 13.4%, hotels and restaurants at 11.4%, non-alcoholic beverages and food 11.2%. Other items are minor contributors to the CPI in the UK. Disappointing inflation data has helped to drive the GBP/EUR currency pair lower. But on a positive note, the recent performance of the UK economy has shown tremendous steel. JPMorgan noted this in its assessment of the GBP/EUR pair.
The GBP index has rallied by approximately 4% since the middle of August 2016. As a result of the strong performance of the UK economy post-Brexit, the number of short GBP positions has declined and traders are attempting to generate profits on the sterling’s recent bullishness. Since the Brexit vote, the sterling has regained approximately 25% of the losses it suffered, and some 20% of its value since it bottomed out in November 2015. JPMorgan was careful to explain that it is not anticipating a strong bullish uptrend with the GBP/EUR currency pair, rather it is a deceleration of the downtrend. For the year ending December 31, 2016, JPMorgan has given future guidance on the GBP/USD currency pair from 1.28 to 1.32 and for the GBP/EUR, from 1.110 to 1.1494. This indicates a significant strengthening of the sterling.
The majority of analysts are bearish on the long-term prospects for the GBP/EUR pair, despite the current rate. Stresses on the UK economy include those related to balance of payments, with a current-account deficit that continues to grow and an investment climate that is not conducive to business and personal investment. Currently, the UK current account is approximately 6% of gross domestic product, while most of the deficit was funded by foreign direct investment and various inflows over the past 5 years. These inflows are subject to negative expectations post-Brexit since uncertainty about the U.K.’s economic and political relationships with the European Union abounds. Even if the UK economy grows by 0.5% in the second half of 2016, JP Morgan analyst anticipating further quantitative easing this year.
Eurozone Surplus Keeps EUR Afloat
On the other side of the coin, the recent measures adopted by the European Central Bank (ECB) appear to support stability for the EUR. The EUR/USD pair has appreciated in 2016 and the European currency has held steady against the GBP despite all of the volatility. Major factors that could impact on the EUR include the Italian non-performing loans saga, elections in Spain, and the impact of a Brexit on European countries. For now, Mario Draghi is reluctant to adopt further QE policies as he clings to the 2% inflation objective. The Eurozone has a current-account surplus, and this is helping to keep the currency afloat.
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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.