Which Currency in the EUR/GBP Pair Will Give More This Christmas?
The technical indicators for the EUR/GBP pair reveal some interesting trends. For starters, the current exchange rate is fast approaching the 200-day moving average of 0.831, currently at 0.8423. The EUR/GBP pair is also trading well below the 50-day moving average at 0.870. The pair looks set to break below the 200-day MA which is rising while the EUR/GBP pair is falling. This indicates clear bearish momentum heading into Christmas and New Year 2017. The EUR has taken a pounding in recent days since the Fed announced a 25-basis point rate hike. At the conclusion of the 2-day Fed FOMC meeting on December 13/14, Janet Yellen raised rates for the first time in 2016. This had an immediate effect on the USD, which filtered off onto the EUR. The more pressing concern for the EUR/GBP pair is the European Central Bank. Recently, Mario Draghi president of the ECB announced the continuance of quantitative easing (QE) policies to the tune of €80 billion, declining to €60 billion in April 2017. This injection of money into the euro zone will help to drive down the value of the currency relative to the GBP, USD, JPY and others. This is precisely why we are seeing euro weakness at this time.
Major Geopolitical Shocks Expected to Rock the EU
Despite upbeat sentiment to the contrary from certain sectors of the European economy, the trend is clear. In the final days of 2016, we can expect the EUR to continue dragging lower against the GBP, and moving increasingly towards parity with the USD. Europe is facing crises on multiple fronts. The recent terror attacks at a Christmas gathering in Germany is a case in point, but it is not an isolated event. Investors shy away from terror-related risk, and this promotes a selloff of sorts in currencies markets. The more pressing concerns are the geopolitical events in countries like Italy, Austria, the upcoming elections in France and of course the ongoing Brexit saga. With respect to Italy, the country’s leading bank recently announced a €5 billion cash injection from its stockholders to avoid a massive bailout from the newly-formed Italian government. The entire European experiment could falter if populist, nationalist governments arise in Italy, Greece, Germany, the UK and others. This could tear at the very fabric of the EU, given the massive tremors that the Brexit saga is already causing.
The Fed Expects Multiple Rate Hikes in 2017 and the EUR Will Not Fare Well
Janet Yellen was clear that rate hikes are coming in 2017. In fact, the Fed FOMC largely anticipates at least 3 rate hikes, while the consensus forecast among Wall Street analysts is that just 2 rate hikes will be implemented. Regardless, this bodes well for the USD and poorly for the EUR and GBP. The reason for this is clear: the diverging yields on US-denominated securities and European and British securities is causing an imbalance. Further, the European Central Bank has promised to continue buying assets with any yield to maturity – not only on those below the threshold of -0.400%. With 1-year debt clearly in the ECBs sights, the ECB wants yields to remain at rock-bottom levels. We are also seeing a strong divergence between the 2-year yield for the German and US treasuries. This is driving dollar strength and pushing EUR weakness. More of this is expected to continue into 2017.
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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.