The euro is proving fairly robust during these times of global economic uncertainty, but I fear this EUR to GBP and EUR to USD movement is down to the economic weakness in other countries, rather than a sign of a stable and lucrative area of commerce.
The euro has huge problems to deal with, inner bickering between member states over funding is one that pops to mind, but let us also look at inflation. Inflation has been a problem within the bloc for many years and there has been numerous attempts to try and combat this problem. Quantitative Easing or QE is one method that has been used. QE is essentially pumping money into an economy in order to stimulate growth. It is a controversial monetary policy as a huge amount of money is borrowed and results are mixed. The EU has pumped billions into the economy, at one stage €80b a month but it has done little to help the economy. Interest rates were dropped to as low as 0.25% in an attempt to get people to spend, but there has been little impact. This leaves little room to manoeuvre now we have been plunged into a global economic crisis thanks to COVID-19.
There have been increases in the infection rate from COVID in areas such as France, Germany and Spain which could lead to further lockdowns which has the potential to hurt the Eurozone economy, but the euro has actually benefited from the problems in the US.
The US is in a terrible situation due to the spread of the pandemic with over 50k new cases being reported per day. The handling of the virus has been poor to say the least. The US dollar has been the safe haven currency of choice as a safe haven among investors since before I can remember due to its huge thirst for consumerism. This status is now starting to be questioned as the long time impact on the US economy could be set to be damaging and wide reaching.
Investors are flooding away from the US dollar in search of another presumed safe currency and despite the euro’s flaws, the euro is proving the destination of choice. The 31st July saw EUR to USD rate hit 1.19, up from 1.06 on 20th March, huge gains. Although rates seem to have stabilised in the last couple of weeks there could be further gains for the euro against the US dollar should the pandemic continue to run riot across the United States.
Brexit Impact on EUR to GBP
The euro could be considered to be heavily overvalued against Sterling at present. The pound is suffering from the pandemic with the UK now officially having entered a recession. Sterling is not the destination of choice among investors in times of global economic uncertainty due to the huge imbalance between imports and exports. But it is Brexit that has been the main catalyst in the demise of the pound.
The historical average on GBP to EUR is 1.33 since the euro’s implementation in 1999. We now sit at 1.10 and GBP to EUR has been as low as 1.06 during 2020. The day of the referendum GBP to EUR stood from the UK’s point of view at a respectable 1.3050. We have seen substantial losses since there was the decision to leave the EU.
Brexit negotiations are due to recommence again this week in the hope of getting a deal across the line by the end of October, the latest point at which a deal can be agreed and implemented. This is a tall order considering there are still major points of contention, fisheries for example.
I am not convinced a deal will come to fruition at least a decent deal that is, if a deal does go through however we could see substantial gains for the pound against the euro. I am confident GBP to EUR could move above 1.20 depending on the terms of the deal.
Boris is playing a dangerous game however, having stated there will be no extension passed 2020 despite an ongoing pandemic. This means if deal is not in place by the end of the year Britain will leave the EU with no deal and the pound will no doubt suffer.
“How much?” Maybe the important question. Commerz Bank are predicting GBP to EUR could go as low as 1.02 although I am not so convinced. The market moves on rumour as well as facts and a no deal scenario I believe has already been largely factored into current levels, which is displayed by the current levels of EUR to GBP compared to pre-Brexit levels, I think talks of parity are unsubstantiated.
And so, if you are a euro seller buying the pound it may be prudent to evaluate your risk appetite. Do you hang on for further potential movement in your favour for potential gains? Or take advantage of what could be considered a good time to sell and take the risk out of your trade? Get in touch to discuss these factors in further detail so you can make an informed decision about when to trade.