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[vc_row][vc_column width="1/1"][vc_column_text]2017 has turned out to be a mixed bag for the pound against the Euro. The shoots of recovery were present in Spring, when Sterling traded at its highest since December, within touching distance of post EU referendum highs. Despite continued strength against the US dollar, the pound has since struggled against its European counterpart. Moving into the latter stages of 2017, however, is this about to change?
With Sterling trading as much as 2% off its 2017 lows, is it time to start asking if Sterling has bottomed against the Euro? Furthermore, is there a chance that we will return to pre-Brexit levels in the future? This report will dig deeper into important upcoming events that could provide direction for Sterling/Euro.
Central banks are likely to play a key role in foreign exchange markets for the remainder of 2017. In particular, the European Central Bank (ECB) will be closely watched this Autumn as the Euro trades at an almost 3-year highs against the US dollar and an 8-year high against Sterling, when excluding October 2016’s ‘flash crash’. Policymakers at the ECB are concerned that Euro strength is hurting exporters in the region, most notably in Germany, while also depressing all-important inflation.
However, the ECB is also contemplating ending its Quantitative Easing (QE) programme, a key dovish policy, which would likely push the Euro higher. But with Euro strength dragging on inflation, will the ECB choose to delay its taper – or even slow rate of the taper – in order to dampen the strong Euro?
Brexit will dominate the airwaves as Britain and the European Union’s negotiations continue. While neither side has yet compromised on the UK’s eventual leaving bill – and the UK government hoping to speed up talks – a ‘major Brexit speech’ by Theresa May has been scheduled for 21 September. Could this be a leaving bill concession, needed to keep the talks moving? If so, the quick progression of talks is likely to help the case of Sterling. Anything likely to delay agreement would have the opposite effect.
The final major European election of the year, the German federal election, takes place on 24 September. Whilst incumbent Chancellor Angela Merkel holds a healthy lead over her main challenger, Martin Schulz of the SPD, the smaller parties may hold the key to the election. Merkel currently leads a ‘grand coalition’ alongside Schulz, however, should the minor parties from the centre perform strongly, Merkel could gain more authority in a new coalition. On the other hand, a surprising late momentum swing for Schulz may even spoil Merkel’s procession. The Euro would likely favour the former.
Finally, an unusual scenario that may arise is the possibility that a crisis in the UK sparks a fresh leadership race for Number 10. Since June’s snap election, in which Theresa May lost her outright parliamentary majority, her position has been continually questioned. Despite managing to defend herself against rumoured leadership bids from Amber Rudd, Boris Johnson and David Davis, the tragic Grenfell disaster put the PM back on shaky ground. Despite her insistence that she will stay to fight the next general election (sometime before 2022) others in her party are less certain. Could another crisis spark a vote of no confidence and subsequently see a third PM installed since 2016’s EU referendum?
Read on to find out what forecasts City of London analysts are making for Sterling against the Euro and how you can protect your FX transactions against further currency fluctuations.[/vc_column_text][/vc_column][/vc_row]
[vc_row][vc_column width="1/1"][vc_column_text]Whether the Pound has found its feet against its European peer or whether there are more hard times ahead, it’s always important to have multiple options available to you to protect your financial position. That’s why being able to secure a forward contract could be a useful addition to your financial toolkit.
When reliant on foreign exchange transactions for either business or pleasure, spot price fluctuations could force you to undertake a currency transaction at an unfavourable rate. A forward contract allows you the security of a guaranteed fixed price, irrespective of future movement, for up to 12 months.
In order to secure a forward contract, a deposit of up to 5% of the overall trade’s value is required. This is then attributed to the forward’s settlement, with the only requirement being that this takes place within the agreed upon time frame. For further details on forward contracts, including examples using recent global events, our previous publication on the subject contains all the relevant information.
While August saw GBP/EUR touch an almost 8-year low of €1.075, excluding October 2016’s flash crash, a positive start to September has seen break a notable 6-week downtrend. Ahead of pivotal ongoing and upcoming events, including Brexit negotiations and central bank meetings, investors will gauge whether the September channel can continue towards €1.10 to test the longer term 4-month downtrend.
City brokers have a positive-leaning outlook, with an average end-2017 target price a little under 1% higher than the current price. Individual broker forecasts range from Nomura’s bullish $1.191 forecast to HSBC’s bearish prediction that the pairing will fall to parity – where £1 would be equal to €1.
Events: BoE –14 Sept; German Election – 24 Sept; ECB – 26 Oct; Brexit negotiations – ongoing
While the Pound has been struggling against the Euro throughout the second half of 2017, the currency is enjoying a much more positive period of trading against its US peer. GBP/USD – commonly referred to as ‘Cable’ – traded a high of $1.327 in August, an 11-month best, and remains above the $1.30 mark. Since the start of May, Cable has diverged from GBP/EUR, however it remains in a 6-month uptrend.
City brokers are generally bearish on the outlook for Cable after 2017’s strong rally, with an average end-2017 target price 2.3% below the current level and less than a quarter expecting the price to increase. Analysts at Nomura are the most bullish, with a $1.37 target price for the end of 2017. HSBC, are once again the most bearish brokers, expecting the pairing to fall to $1.20 by the end of the year.
Events: BoE –14 Sept, 2 Nov; Fed - 20 Sept, 1 Nov; Brexit negotiations – ongoing
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Bullish: Nomura, Target €1.191, +8.6%, (10 Jul)
Average Target: €1.099, +0.2% (7 Sept)
Bearish: HSBC, Target €1.000, -8.8% (25 Aug)
Pricing and consensus data sourced from Bloomberg on 7 Sept. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row]
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Bullish: Nomura, Target $1.37, +3.9%, (10 Jul)
Average Target: $1.28, -2.9% (7 Sept)
Bearish: HSBC, Target $1.20, -9.0% (25 Aug)
Pricing and consensus data sourced from Bloomberg on 7 Sept. Please contact us for a full, up to date rundown.[/vc_column_text][/vc_column][/vc_row]
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This research is produced by Accendo Markets Limited. Research produced and disseminated by Accendo Markets is classified as non-independent research, and is therefore a marketing communication. This investment research has not been prepared in accordance with legal requirements designed to promote its independence and it is not subject to the prohibition on dealing ahead of the dissemination of investment research. This research does not constitute a personal recommendation or offer to enter into a transaction or an investment, and is produced and distributed for information purposes only.
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