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Currency pair remarkably stable – until Johnson resignation

Published: Wednesday 11 July 2018

  • ​​Good news from Germany
  • Concern over US trade tariffs
  • Major developments and drama in Brexit
Given all the action going on between the UK and Europe, there has been surprisingly little movement between Sterling and the Euro in the last month.

In fact, looking at typical mid-market rates, GBPEUR moved just 0.3% from around 1.1289 to 1.146 – until the resignation of UK Foreign Secretary Boris Johnson over Brexit policy on 9th July, which saw the Pound immediately slump to around 1.1250.

Good news from Germany

Good news from Germany, both economically and politically, bolstered the Euro’s performance against the Pound during the month.

For a while, it looked as though the Euro might be set for a downturn after German interior minister, Horst Seehofer, the leader of the Christian Social Union, threatened to resign or bring down the coalition government over immigration policy.

However, Germany’s Chancellor Angela Merkel reached a compromise with Herr Seehofer and leader of the Christian Social Union party over immigration policy, averting his resignation and a political crisis that could have threatened the coalition government. The Euro rose marginally against GBP following the news. The agreement was later approved by Mrs Merkel’s centre-left Social Democratic Party (SPD) partners and legislation is due later in the year.

A jump in German industrial orders provided welcome news, but that was followed by a mixed performance by exports in May, which rose 1.8% in the month, but were down 1.3% year-on-year.

In January, European Central Bank President, Mario Draghi, signalled that interest rates may remain at record lows until the end of 2019.

A trade war has already begun

Talking of trade, worries remain over how the United States tariffs of 25% on European aluminium imports and 10% on steel imports will affect the economies of European countries.

The European Union has introduced “rebalancing” tariffs of around €2.8 billion worth of tariffs on US steel, plus other goods, including bourbon, peanut butter, cranberries and orange juice.

In all, US investment in the EU is three times higher than in all of Asia and EU investment in the US is around eight times the amount of that in India and China, so you can see what is as stake.

The French Finance Minister Bruno Le Maire has urged the United States not to impose further tariffs on the EU. “Let it be known that if we are attacked we will react collectively and we will react firmly,” he says. “The question is no longer whether or not there will be a trade war, the war has already started.”
Euros coins and notes - Halo Financial

Major developments and drama in Brexit

Over the last few days, there have been still more major developments and drama in the Brexit process.

In early July, the UK cabinet held an important summit at the Prime Minister’s Chequers country estate on Brexit in a bid to agree the terms of trade following the UK’s exit from the European Union in March 2019.

Theresa May and colleagues were trying to agree a way forward that Brexiteers and Remainers could both accept.

A so-called ‘soft Brexit’ plan to create a free trade area for industrial and agricultural goods and the idea of setting up a “combined customs territory” was the strategy that emerged.

However, the proposals angered hard-line Brexiteers that was even before the plan has to pass another tricky hurdle of being acceptable to the European Union itself.

Indeed, two days after the Chequers summit, Brexit Secretary David Davis resigned, followed by junior ministers, Steve Baker and Suella Braverman, who were all members of the Department for Exiting the European Union.

Mr Davis said he was unable to continue as the current policies and tactics made it "look less and less likely" that the UK would leave the customs union and single market.

Then a day later, controversial Foreign Secretary Boris Johnson and Brexit campaign figurehead resigned, immediately sending the Pound from around 1.1335 down to almost 1.1250.

Now, the whispers that disaffected Brexiteers are planning to challenge the UK Prime Minister Theresa May, threatening to bring down her minority government, are growing even stronger.

It looks to be an interesting month ahead for the Pound and the Euro. Keep up-to-date with how the news affects the currency markets with Halo Financial.

Guidance for buying Euros

The Sterling-Euro exchange rate has continued to trade within a four-cent channel. The currency pair has been trapped in this range since mid-September. Buyers of Euros need to limit their optimism, as it’s unlikely to break out on the top side until there is some clarity around the nature of Brexit. Initial limit orders would need to be placed below 1.15 which is the previous high and where there is clearly some resistance. If 1.15 gives way, then the top of the channel would be the next level to target at around 1.16.

There’s a slight upside tilt on the channel with higher highs and lower lows however, as it stands the currency pair is at the lower end of the range so protection is crucial. Near term protection should be placed in the way of a stop loss just outside of the channel, below 1.1250 and then below 1.1150.

Guidance for selling Euros

Due to the nature of how range bound the Sterling-Euro exchange rate has been, now would be an opportunity to reduce your currency exposure as it’s near the bottom of the trading channel. Despite stronger fundamentals, negative sentiment towards the Pound still persists, so if the currency pair breaks the lower end of the channel it opens up the previous low in March of 1.1150.

Short term protection in the way of a stop loss needs to be placed above the high in April of 1.15 or depending on appetite to risk/time frame a deep stop is needed above 1.1650.

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