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Euro Research Report

Published: Thursday 30 March 2017

  • ​​Theresa May triggers Article 50
  • Sterling-Euro will remain volatile for quite some time
  • Bank of England (BoE) may raise rates to curb inflation
By Denzil Rickerby
Signed, sealed and delivered, as UK Prime Minister, Theresa May, formalised the UK’s divorce from the European Union, triggering the two-year countdown. Theresa May described the departure as “a historic moment, from which there can be no turning back”, which creates a “unique opportunity” to “shape a brighter future” for the UK. There was minimal impact in the currency markets after the letter was delivered to EU President Donald Tusk, as Sterling remained strong against its main counterparts. Initially, as Prime Minister May spoke, Sterling strengthened slightly against both the US Dollar and the Euro, as her decision to pre-announce the date of Article 50 being triggered and her conciliatory tone helped lessen the blow of any currency market jitters.
Theresa May: “a historic moment, from which there can be no turning back”.

How is Brexit affecting the Sterling-Euro rate?

The trading range on Sterling-Euro appears to be converging, creating a formation with higher lows, but with lower highs. This means the currency pairing is volatile, and will continue to be for the near future, as negotiations, announcements and developments become clear, both concerning the UK’s departure from the EU, and the effects of the forthcoming French and German elections. Any indication of either a hard or soft Brexit is likely to affect the exchange rate and will shape the direction over the coming days and months.

How is the UK economy faring?

The domestic UK economic growth has defied even the most optimistic of economists, driven by the resilience of the British consumer. This resilience, together with external global growth pressures, is setting the scene for an upside surprise in the British Pound. The undervalued Pound has helped cushion any fallout from Brexit and has helped push inflation over the Bank of England’s (BoE) target of 2% - potentially forcing the Bank of England to raise rates sooner they would like to in order to curb inflation. The market has grown complacent, but the thing to remember is that, yes, the economy has been resilient, however, the process has only just begun and the remaining 27 members won’t begin discussing the Brexit formally until the special European Council Summit in Brussels on 29th April. So, until then, we don’t know how conciliatory the EU will be. What is becoming clear is that the UK may need to pay a £50 Billion Brexit bill before any negotiations begin, potentially delaying the process further, making the two-year deadline even tighter.
Healthy rise in investment and consumer spending in Europe.
What’s in store for Europe?

Europe, like Britain, has seen improved growth in the last quarter, driven by a healthy rise in investment and consumer spending. Inflation has reached the highest level in four years, climbing above the European Central Bank (ECB) target rate, triggering renewed calls from Germany to rein in a loose monetary stance.
The Eurozone is close to a turning point, amid accelerating inflation and stronger growth prospects, however, it still faces many near and long term threats. The Eurozone will not only have the uncertainty of Brexit to contend with, but a year full of major Eurozone elections, which started with a vote in the Netherlands and ends with Germany in September. The market is pricing in excessive political risk, as the market doesn’t want to make the same mistake it saw in under-pricing Brexit and the US elections. Economists expect political uncertainty, coupled with rising inflation, to put the brakes on economic growth later on in the year.

Guidance for Euro Buyers

Expect a lot of political jockeying over the next few months; and Brexit will not be a linear process. There are now, however, two ways risks which have come back into play due to the Eurozone elections. Look to target the top of the range below the 1.18 level and a stop loss below the low we saw in March of 1.14.

Guidance for Euro Sellers

A rebound from excessive pricing of political risk for 2017 could strengthen the Euro against the Pound after the European elections if no populist party gains power. Near term, target 1.14 and a medium term target of 1.10. In a year like 2017, full of elections, you need protection, with stop losses in place in case we see any surprise rate changes surface. Look for a stop loss above 1.18 and medium term protection in above 1.22, which coincides with the long term uptrend that has broken.

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