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2018

‘Barnier bounce’ sees Pound gain on Euro

Published: Wednesday 12 September 2018

  • ​​Good news on Italian and German economies
  • Euro Gross Domestic Product slowdown ‘temporary’
  • 200 days until Brexit
Much like other major Sterling pairings, GBP has risen against the Euro in the last few weeks, but the increase has been less pronounced. The low of typical mid-market rates was around 1.099 and the high around 1.124, which is fairly similar to the previous month. The Euro gained on good news about the Italian and German economies. But the Pound rose even more thanks to the ‘Barnier bounce’, following comments by the EU negotiator that a Brexit deal could still be reached.

Sterling was also boosted by positive economic data, including the strongest growth of 2018. In the three months to July 2018, growth rose to 0.6%, up 0.2% from the previous quarter, according to Office for National Statistics data.

Good news on Italian and German economies?

Investors in two leading European nations received good news in September, strengthening the Euro. First, Italy’s finance minister, Giovanni Tria, promised the new government would introduce prudent fiscal measures, leading to falls in bond yields.

In the summer, Italy bonds were heavily sold over fears that the country’s debt burden of around 130% would increase due to radical coalition plans.

But Mr Tria says, “As the government puts words into actions, the (bond yield) spread will return to more normal levels.”

And lo and behold, the following day, Italy/Germany 10-year bond yield spread hit a six-week low of 234.1 basis points.

There was also good news in Germany, where investor sentiment over the economy improved. Although still in negative territory, September’s -10.6 point score in the ZEW economic sentiment indicator was 3.1 points up on the month and above expectations.

Economists were relieved that US President Donald Trump has halted a trade war with Europe and is moving ahead with a bi-lateral trade deal with Mexico.

ZEW President, Professor Achim Wambach, says, “The considerable fears displayed by the survey participants regarding the economic development have diminished somewhat, which may in part be attributable to the new trade agreement between the US and Mexico.”

At the same time, Germany is close to meeting the European Union’s Maastricht public debt ceiling target, of under 60% of national output. It could happen this year or next, says Finance Minister Olaf Scholz.

Euro Gross Domestic Product slowdown ‘temporary’

European Union finance chiefs say a slowdown in Gross Domestic Product to and estimated 0.4% in the second quarter of 2018 is a temporary blip.

But they are still concerned about the effect of any escalation in international trade wars.
The rate was the same pace as January-March, but a 0.3% fall on the final quarter of 2017. The annual growth rate was 2.1%.

GDP growth picked up in Germany from 0.4%-0.5%, the Netherlands, 0.6%-0.7%, Belgium, 0.3%-0.4%, Portugal, 0.4%-0.5%, Estonia, 0.2%-1.4%, Malta, 0.9%-1.9%, Slovenia, 0.5%-0.8%,  Slovakia, 1%-1.1% and the UK, 0.2%-0.4%.

Growth was unchanged in France at 0.2% and Lithuania on 0.9%.

It slowed in Italy (0.3%-0.2%), Spain (0.7%-0.6%), Finland (1.2%-0.3%), Austria (0.9%-0.5%), Greece (0.9%-0.2%), Latvia (1.5%-0.9%) and Cyprus (1%-0.8%). 

European Central Bank chiefs say slower growth is likely to be “largely temporary”, but trade wars could have a significant impact.

The latest industrial production figures from the Eurozone could also hit the Euro: last month’s figures were disappointing and another decline is forecast.

Euro notes laid out

Under 200 days until Brexit

There are now fewer than 200 days to go until Brexit and still no-one really knows under what terms Britain will leave the European Union.

Speculation swings wildly. On the one hand, chief negotiator for the EU, Michel Barnier, offered a glimmer of hope for a deal by hinting that there could be a trade deal reached in line with the £39 billion ‘divorce’ payment from the UK to the EU. He says it is "realistic" to expect an agreement by early November at the latest.

On the other, Prime Minister Theresa May has been warned that up to 80 Conservative MPs could oppose her Chequers plan for future relations with the EU in a Commons vote.

Meanwhile, former foreign secretary, Boris Johnson, and potential leadership candidate is waiting in the wings if Mrs May should lose a confidence vote. Mr Johnson hit out at the Chequer’s plan, controversially describing it as putting a "suicide vest" around Britain.

Mr Johnson was among backers at the launch of a new report arguing that the UK could benefit from ‘no deal’ with the European Union.

The Economists For Free Trade report says the UK has "nothing to fear" from a clean break from the EU. In fact, the country cold benefit to the tune of £80billion through following World Trade Organisation rules, it states.

Jacob Rees-Mogg, Chair of the pro-Brexit European Research Group of Tory MPs, says, "Leaving on a world trade deal is a perfectly sensible thing to do but I think we can do better.”

He backs a Canada plus-style free-trade deal with Brussels that will enable the UK to retain the benefits of leaving the European Union on “the most friendly terms we can manage”.

Canada’s free trade deal, the Comprehensive Economic and Trade Agreement (CETA) removes almost all customs tariffs on goods moving between the two trading blocs.
 
Guidance for Euro buyers

The Sterling-Euro rate has bounced from the low in August 2018, which was the previous low last seen in September 2017. The markets are waiting with baited breath on the negotiations and how that will shape the future of the UK, which means it’s a high risk scenario. As a result, the market will be very volatile. The rate is approaching the bottom of the previous channel, to which it had been trading within for the most part of 2018.
 
Until the rate breaks 1.13, the Sterling-Euro rate is still classified as being in a downtrend, so look to reduce some of your current exposure at the current levels in the case of a no deal hard Brexit, although after the more conciliatory tone from EU chief negotiator Michel Barnier, I do see more upside in the long term. A break of 1.13 will open up a move to previous high of 1.15, although I would be tempted to reduce my exposure here and then leave the upside uncapped.

Guidance for Euro sellers

This is a massive game of roulette, as the markets are ignoring the fundamentals and trading purely on the political risk. With the recent rise in the GBP, we can see there is now two-way risk, so it depends entirely on your appetite to risk and whether you think the UK can agree a soft Brexit or not. We are still near multi-year lows and a sniff of a soft Brexit would see this move aggressively higher (against you), however, on the flipside, a hard Brexit would likely see the rate reach a new low. The Sterling-Euro rate has been in a medium term downtrend since April 2018, so it may be wise to look to leave a Stop loss order above 1.13, which is the previous near high and above the trend resistance.

GBPEUR - Research Report Chart - September 2018

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