Tuesday, 29 November 2016

Italian referendum effect Pound/Euro exchange rates

Sterling/Euro rates seem to have been range-bound between around €1.17 and €1.18 over the last week as the chart below shows.  After rising by 5% earlier in the month, the pair now seems to have found a comfortable level around the best it's been in nearly 3 months.


Part of the reason the rate has recovered is the fact that the UK economy, for now, does not seem to have been negatively affected by the vote to leave the EU and continues to show resilience. The other reason rates have risen is due to the single currency becoming weaker and cheaper to buy.

Euro weakens on EU political concerns


Next week there is an Italian constitutional referendum, and next year, French and German elections. In the wake of Brexit and the surprise Trump victory, there are concerns that there may be populist voting in Europe, and this uncertainty has started to weaken the Euro which is one of the reasons rates have recovered by 5% this month.

Italian referendum and effect on GBP/EUR exchange rates


Take next week's  Italian referendum as an example. The vote itself is simply a decision on amending the Italian Constitution to reform the appointment and powers of the Parliament of Italy. In reality however, it means much more than that and has far reaching consequences. If for example the results don't go the way of Prime Minister Renzi, then it would undermine Italy's fragile political stability. In turn this could lead to Renzi resigning and the Five Star movement could win power. They have promised a full on referendum on staying in the Euro area, and so could effectively lead to the break up of the EU. That's why markets are concerned and the Euro is weakening.

If Renzi does lose the vote, then there will be political and economic turmoil across the EU, which may well weaken the Euro further and push GBP/EUR higher. If he wins however, expect the single currency to regain strength and rates to drop back away from the current highs.

Options to consider if you need to buy or sell Euros


Next week's political event in Italy is likely to move GBP/EUR rates out of the current €1.17 to €1.18 range. A win for the Prime minister is likely to push rates lower, losing could push rates higher. Either way, I think we'll see some movement for Pound/Euro rates. If you need to buy or sell Euros then you should get in touch to discuss your options rather than just waiting to see what happens and hoping that things move your way.

For example those that need to convert Pounds to Euros may want to hold out to see if rates improve next week, but should also take in to consideration that rates are close to a 3 month high. In this example a client that doesn't want to take a risk should lock in the rate now with a Forward contract. Those that are happy to take a gamble, should consider placing a Stop Loss order to ensure that if the rate moves the wrong way, they are protected, while still being able to take advantage of a further spike in the GBP/EUR rate.

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