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

Living France - - Les Pratiques -

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. cur­ren­cies­di­

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