November was a positive month for the sterling to euro exchange rate with the British currency making steady gains against its currency bloc counterpart, writes Ben Scott.

The pound enjoyed an upward boost when the High Court ruled that the UK government would need the backing of parliament before triggering Article 50 – positive news for sterling which has suffered Brexit fear losses after the monumental vote earlier in the year.

The prospect of the UK making a slower exit from the European Union than first thought allowed sterling to rally by over 1% against both the euro and the US dollar. Investors bought back the pound as they priced in a delayed and potentially watered down exit, rather than the initially feared, ‘hard Brexit’.

However, UK economic data has been mixed throughout November. The month began with Markit’s October manufacturing purchasing managers index (PMI) (which indicates the health of the manufacturing sector), drop below forecasts from 54.5 to 54.3. Any figure above 50.0 indicates growth, whereas below suggests contraction. Although October’s ecostat remained in positive territory, investor sentiment can sway on a below predicted reading such as this and October’s number forced the pound to become weaker at 1.1048 (point A on the graph).

However, sterling was offered some support rising to 1.1234 (point B) when the UK construction PMI revealed that the sector had experienced an unexpected increase during the month of October, rising from September’s 52.3 to 52.6. Economists had expected a slip to 51.8 so the figure was well received by a pessimistic Brexit-troubled market.

In central bank news, the Bank of England (BoE) announced that Governor Mark Carney would stay in his position until June 2019 meaning that he will remain in place for an additional year more than his agreed upon contract. The move was applauded by Prime Minister Theresa May as a positive step while the UK negotiates its exit from the European Union. Carney said he ‘recognised the importance to the country of continuity’ during Brexit negotiations. Carney has been well respected since he took up the post as Governor and markets like the stability his continued involvement as Chief of the Bank of England during the UK’s British exit offers.

As the month continued, the pound was able to claw back some additional strength as the market became more volatile due to the US election. Investor sentiment was shrouded with uncertainty on who would win the US presidential race and the dollar felt the impact.

Meanwhile, the pound to euro exchange rate jumped by 1.5% as investors unwound short positions against sterling while the world digested the election fallout and focused on upcoming European political risks instead (point B).

However, the GBP/USD exchange rate could experience losses if the US Federal Reserve opt to increase interest rates in their December 14th policy meeting. The US has produced a string of favourable economic data and with November’s meeting minutes suggesting that rates may rise by the end of the year, investors will be looking towards the last policy rate decision of 2016 with keen anticipation.

The pound was also able to hit its highest level since October’s ‘flash crash’ as UK construction figures exceeded forecasts and the Trump presidency allowed Brexit fears to remain in the background. The euro to US dollar exchange rate recorded losses as the market took a surprisingly optimistic stance on Trump’s election, bolstering predictions for EUR/USD parity in 2017.

Meanwhile, point C shows the GBP/EUR exchange rate sliding slightly to 1.1585 on account of a heavy data day in the economic calendar. The UK’s core consumer price index (CPI) slipped in October from 1.5% to only 1.2% - lower than the 1.4% prediction. Inflation did manage to register a slight increase in October of 0.1%, but remained weaker than the 0.3% economists had forecast.

GBP/EUR Exchange Rate Forecast

With the constitutional reform proposals of Italian Prime Minister Matteo Renzi defeated last weekend, there are fears that the country’s political stability will be upturned. The vote was called due to Renzi’s idea that the most efficient way for the government to kick-start the economy was to streamline the decision-making process and have more power.

Renzi has announced that he will step down, potentially throwing Italy into early elections and heightening concern that the populist Five Star Movement party could enjoy a surge in support. The Five Star Movement have vowed to hold a referendum as to whether Italy will remain in the eurozone – a prospect that’s likely to cause massive market fluctuations.

More encourangly, Austria’s presidential election took place on December 4th, when the far-right candidate was defeated, giving the single currency a reason to experience some stabilty.

Long-term, the spring’s French and Dutch political elections could create further developments in the markets – especially if the Netherlands votes in a Eurosceptic party.

Meanwhile, the UK will have its own political events in December, such as the Supreme Court Government-Parliament Brexit appeal which began on December 5th, , with a judgement due on December 8th.

In terms of economic data, the UK’s balance of trade figures on Friday 9th December are likely to cause some market fluctuations after September’s figure revealed a bigger than forecast widening of the deficit to -£12.7bn. A further widening may cause the pound to dip.

Long-term, the biggest risks to the GBP/EUR currency pair are political factors. With the British government facing legal challenges regarding the UK’s status in the European Union over both the single-question form of the referendum and parliament’s power to formally trigger Brexit, sterling is likely to be a little volatile.

Ben Scott
Foreign Exchange Ltd
www.fcexchange.co.uk