Thursday, 28 July 2016

Pound/Euro range-bound at €1.19; but is it really that bad?

Sterling remains range-bound against the single currency, with GBP/EUR rates stuck around the €1.19 mark. This is illustrated in the chart below showing the currency movements this week:


As I outlined in my last post, it's probably the case of the market simply waiting to see what will happen with both 'post-brexit' economic figures, in addition to anticipation of what will happen with the Bank of England next week, and if they will cut interest rates as many expect.

We did see GDP data from the UK yesterday, which was better than expected. It should be noted however that these figures were for Q2, so only represented the economy in the run up to the EU referendum. Still, it was positive as most had expected the economy to slow slightly as uncertainty about the vote crept into the economy.

Blame it on the Brexit?


Today the Pound fell a little on news that Lloyds would be axing around 3000 jobs in the UK, blaming Brexit uncertainty. Personally I think this is nonsense. They have also just announced that there has been a 101% increase in pre-tax profits, and in any case, nobody knows what effect leaving the EU will have on the UK economy short term. It's more likely the fact that most people use mobile and Internet banking these days, so there really isn't the need there used to be to sustain a huge branch network.

Expect more and more cases of 'Blame it on the brexit' in the coming months. It's an easy thing to blame things on, as pointed out by the former director of the CBI, who stated there's unlikely to be significant economic pain, stating that it's very convenient to blame things on the vote to leave. Personally I think that there will be a short term negative economic effect on the economy, but longer term I actually think that the economy will be stronger in the long run, as the UK goes global and has more opportunities to trade outside of the EU with countries like China, that has never had a free trade deal with the EU. The challenge will be negotiating these while rebuilding a close trading relationship with the EU.

GBP/EUR rates aren't that bad


It's also important for any clients that need to convert Pounds to Euros to keep things in context. Soon people will become used to the current levels as the new norm. I remember back in 2008/2009 when GBP/EUR rates fell to €1.02/€1.03 - people still bought property overseas and converted currency. Yes the rates are lower than they have been as the market has corrected, but it's been much lower than this in the recent past. If you look back at the last 8 years or so, the average rate is actually about €1.20 - pretty much the levels we're trading at right now.

It's easy to get caught up in all the negativity in the UK press, but when you take a step back and look at things objectively, things aren't really that bad. Those needing to buy Euros may be holding out hoping rates will recover back to €1.30. They will eventually, but this will take quite a while, and I think the rate will get worse before it gets better. With the BoE widely expected to cut interest rates twice this year, GBP/EUR rates are quite likely to drop further in the short to medium term.

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