Amir Khan, corporate dealer with Currencies Direct says that while the buoyant euro is surging ahead, sterling is struggling to keep its head above water
Currency markets have been fairly volatile in the past month, mainly owing to uncertainty over negotiations over Britain’s exit from the EU. Drastic swings and weakness in the pound continue to remain the major theme for the next few weeks as politicians try to let the dust settle over major announcements that the UK is set to trigger Article 50 before the end of March 2017. No sooner had Theresa May made the announcements, Angela Merkel was quick to retaliate that freedom of movement and single market access are interlinked and access cannot be granted for either one on its own.
Not surprisingly, the euro was quick to make gains against sterling, as it has been on a downward spiral since the referendum result in the UK, with rates dropping from the 1.20s to the 1.15 to 1.17 levels. To add insult to injury, the pound’s weakness was exacerbated by a flash crash that further weakened sterling, drastically losing 6% in just over two minutes, and it is currently trading close to the 1.10 levels against the euro.
Political events over the last month have moved the focus of currency markets slightly away from Central Bank actions. However, the divergence continues to widen as the US Federal Reserve is increasingly likely to raise interest rates in 2016, whereas the European Central Bank continues to maintain its monthly asset purchase scheme to instil further impetus to the market to try and bring up liquidity and inflation in the region. While the euro continues to hold onto strength, it could potentially manifest into weaker exports, though consumer confidence in Germany seems solid as a rock.
The euro also strengthened following the news that the European Central Bank is contemplating tapering the current stimulus measures. This would mean trying to let markets function without further liquidity injections, though members of the ECB came out with statements rubbishing the claims as rumours, and mentioned that nothing of the sort has been planned.
Coming to the fundamentals, economic data-wise, both the pound and the euro have had a very mixed set of numbers with positive data emanating meagrely and in spurts. However, markets seem to have completely ignored fundamentals this past month as political events take centre stage. The euro continues to hold onto strength as Brexit is the main concern as far as Europe and the UK are concerned; whereas the outcome of an imminent US general election and a Federal Reserve interest rate hike remain key components in determining direction for the near future. currenciesdirect.com