Thursday, 20 April 2017

Will Pound/Euro rise above €1.20?

The Pound has managed to hang on to the gains we saw earlier this week following Theresa May's snap election announcement on Tuesday. When there is such a large spike in exchange rates we often see a correction back down, however Sterling remains supported at €1.19+ against the Euro and $1.28+ against the Dollar, rates we haven't seen since last year.

Why has the Pound gained?


It's really down to the EU negotiations. If May wins the election, which she surely will by a huge majority, then it gives her a much stronger Mandate and a bigger majority in the Commons. This means she can make the compromises needed with the EU in order to make a smooth exit and get a better deal. (Before the election announcement, she's been having to capitulate to the 'Hard Brexiteers' in her own party.)

In other words, there is now much less chance of an extreme 'Hard Brexit' with no deal, and now there is a better chance of smoother negotiations with the 'EU 27' and much more likelihood of a deal that's going to be much better for both Britain and the EU.

The markets certainly think so anyway, which is why the Pound has strengthened, and held on to it's gains, for now.


Will Pound/Euro rates break €1.20?



I personally think this is unlikely in the short to medium term. If you look at how Pound/Euro rates have fared since the referendum, you will see that there have been 5 or 6 occasions that we've reached €1.20, however each and every time it's dropped back again. €1.20 is such a key technical level of resistance it can't seem to break through it. In the short term, I think much will depend on the French elections. It's expected that Marine Le Pen will get through the first round this weekend, but then be knocked out of the second round on the 7th of May. Assuming this is the case, then the Euro will likely strengthen and pull GBP/EUR lower again.

Of course, polling of late has been quite unreliable; if Le Pen wins and becomes president or polls start to suggest it's a possibility, then the markets are going to get very nervous indeed and the Euro is likely to weaken significantly, as it opens a Pandora's box for the EU; Frexit? Return the French Franc? A collapse of the whole EU project? It certainly wouldn't be pretty, and in this scenario, I'd expect GBP/EUR to surge to €1.25.

The here and now


Right now the Pound is much stronger than it has been, and rates to buy Euros are very good indeed, and if you need to convert Sterling to another currency, then it's worth considering fixing a rate sooner rather than later. If the French elections go as expected, we'll probably see rates drop away again.

Other options include 'Stop Loss' & 'Limit' orders, to automatically fix a rate if it drops below, or goes above, a particular level. This is very useful in volatile times as it let's you gamble on the rate getting better still, without risking a much worse rate if the market suddenly moves against you.

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