Brexit caused the pound to euro (GBP/EUR) exchange rate to yo-yo in November, with some dramatic dips and impressive rallies taking place, writes Ben Scott of FC Exchange.

During November, the GBP/EUR exchange rate hit interbank highs of 1.1403, while dropping to lows of 1.1099.

The start of November wasn’t particularly positive as sterling took a dive from interbank levels of 1.14 against the euro on November 1st, to dwell at 1.11 on November 2nd (Point A), marking its steepest drop in almost five months on a trade-weighted basis. The fall was inspired by the Bank of England’s (BoE) decision to hike interest rates for the first time in almost a decade, as investors priced in only a few further increases over the next few years.

Additionally, November saw politics play a large part in determining the pound’s movement. Theresa May had to call back Secretary of State for International Development, Priti Patel, from holiday after it had become clear she’d held unauthorised meetings with Israeli officials and the world watched as the Prime Minister lost her second cabinet minister in just a week. Defence secretary Michael Fallon quit the week before, stating that his behaviour had ‘fallen short’. The political instability rocked the UK governments and the market, causing risk-off mode for sterling amid an already chaotic Brexit with little progress to speak of.

Adding to the chaos was chief EU negotiator Michel Barnier stating that the UK had a two-week deadline to provide ‘vital’ clarification regarding the UK’s divorce bill.

Additionally, the European Commission cut UK growth forecasts to announce that the UK would likely only see 1.5% expansion in 2017, 1.3% in 2018, and 1.1% in 2019.

Meanwhile, Eurozone growth forecasts were positively revised, with strong performances from Spain and Germany enabling currency bloc growth forecasts to reach 2.2% this year and 2.1% next year.

The euro also experienced political fluctuations at the start of October in the aftermath of Catalonia’s independence referendum.

Wage Lethargy a Drag on Sterling

Wage growth has been the Bank of England’s bugbear since the Global Financial Crisis (GFC) and it seems Brexit Britain isn’t helping matters. Britain’s unemployment levels are sat at 42-year lows, yet the strong labour market shows wage growth dragging its heels, at only 2.2% on the year in September, according to the Office for National Statistics. The weak figure means real wages are falling against a backdrop of high inflation, currently residing at 3.0%.

ING representative James Smith shed some light on the matter, saying: 'The outlook is that wage growth will pick-up strongly next year amongst other reasons, because of the strength of the jobs market. However, with Brexit and political uncertainty elevated and broader economic growth slowing, we think wage growth may not pick-up quite as sharply.’

Sterling took another tumble on the news of poor wages, (Point B).

Eurozone Steams Ahead

By the end of November, reports were flooding in that Eurozone confidence had reached a 17-year peak, with hiring plans hitting an even more impressive 30-year high. Confidence has been rising following safe victories in a few elections that had the potential to leave the currency bloc and the euro in a sticky situation, with EU referendums of their own.

The European Commission stated: ‘Employment plans saw significant upward revisions in retail trade and industry, both indicators reaching the highest levels in more than 30 years. In construction, employment plans improved more moderately, while also reading a 10-year high. Employment plans worsened slightly in the services sector.’

However, one factor not going so well for the Eurozone is inflation, which is still struggling to pick up. The November figure failed to reach the 1.6% forecast, and instead resided at 1.5% in November, despite an increase in energy bills. The strong Eurozone labour market recovery hasn’t yet yielded a pick-up in inflation and wages as many were hoping. Energy price volatility could also be a cause of inflation weakness as markets head into the New Year and it’s certainly an ecostats investors will be keeping a close eye on.

A Leap Higher

However, although sterling had had a few drops early in the month, the British currency was able to regain some strength as November drew to a close (Point C). The GBP/EUR jump came as Brexit seemed to be making good progress, with Theresa May reported to be upping her offering for the divorce bill to push talks on to trade. The pound to euro (GBP/EUR) exchange rate breached the 1.14 level on several occasions towards the end of November and start of December, while the pound to US dollar (GBP/USD) exchange rate broke through the 1.35 key technical level.

Can a Brexit Deal Be Made in 2017?

In some cases, economic data is falling by the wayside as investors focus the majority of their attention on Brexit. It’s a high-pressure time for the UK government as Theresa May was given the 4th December as a deadline to make progress in a number of areas, including the Brexit divorce bill, before talks could move onto the rest of the transition. However, it seems as if May’s hit a stumbling block in the form of the Irish border and she now has just days to claw together an agreement after threats circled that she’d face a leadership battle should she fail this time.

The start of December has exposed May’s political weakness and as the month continues, the gains from Brexit optimism earlier on, could soon begin to diminish. By the 5th December, the pound had reversed some of its progress, falling sharply on the uncertainty surrounding the Brexit talks to reside at around 1.13 against the euro, and occasionally dipping to 1.12. Further losses could occur should talks break down, meaning the pound could be a wildcard throughout the month.

In terms of economic data, any growth stats will be watched closely, as will inflation and labour market data. Germany has had a turbulent few months following the German election uncertainty, and as Angela Merkel continues to try and build a coalition, it’s likely the euro could feel some fluctuations on the outcome. Confidence numbers may therefore experience some swings as political uncertainty continues.

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