EUR/GBP: heading for 0.92 this summer

15 July 2020

brexit-blog-2

The EUR/GBP pair is trading in the black. Up 0.37% this month, with a three-month rise of nearly 3%, not to mention a leap of almost 6% since the beginning of the year. The euro’s rise can be explained more by the floundering pound due to Brexit-related uncertainties than by any long-term return of investor confidence in the eurozone. Britain fared the worst of all the G10 currencies (the most traded currencies in the world, and hence the most liquid), not just for June but for the entire second quarter.

The various measures announced by the UK Government since March, though praised for their scale and promptness, did nothing to reverse the trend. Nevertheless, nearly £30 billion (€33 million) are being spent to prop up the British economy, particularly in the form of a VAT cut for certain sectors, as well as an employment scheme for young people. In addition, as promised, the Bank of England has purchased all the debt issued to cover the cost of the crisis, thus forestalling any increase in the cost of borrowing that could have led to a sovereign debt crisis. Operators seemingly couldn’t care less however, as they remain focused on the future economic cost of Brexit for the UK, which could only serve to heighten the current crisis.

Although the forex market has already partially adjusted prices to account for the ongoing uncertainties in the trade negotiations between London and Brussels, we believe there is still a chance of further bearish movement. As we see it, the EUR/GBP pair could reach 0.92 by the end of the summer period, returning to March 2020 levels.

There are four main factors that could trigger a sharper fall in the pound sterling over the coming weeks and months:
  • Negotiations between the EU and the UK - which are the main driving force behind the sterling rate - are likely to experience highs and especially many lows (as we recently saw with the thorny issue of fisheries), which could strengthen the antipathy of investors towards the British currency. That said, we are fully expecting a last-minute deal to materialise, most likely at some point between October and the end of the year, just before the UK leaves the Union for good.
  • Based on the COT report from the Commodity Futures Trading Commission (CFTC), a much-valued document for its insights into the positions held by traders in the main currency pairs, the market is largely going short for the pound sterling (i.e. a seller’s market). Not just with the euro, but with all other G10 currencies, except the Canadian dollar.
  • Operators are predicting that the Bank of England will announce negative interest rates in early 2021, which mechanically pushes down the exchange rate for the currency in question, as happened with the euro when the European Central Bank adopted the same non-conventional monetary policy.
  • A second stock market slump, similar to the one in March, is possible if the health crisis continues to intensify, leading to economic gridlock in certain regions, with the US being a likely victim. This could prompt forex market operators to resort to safe haven assets and abandon currencies thought to be at risk, such as the pound sterling. Remember that, when the financial markets crashed in March, the British currency slumped by nearly 8% against the euro in the space of 20 days, as the euro was viewed as more likely to withstand the crisis than the pound.

Economic calendar:

DATE CURRENCY EVENT
14 July EUR

ZEW Indicator of Economic Sentiment for Germany (July)

15 July CAD

Meeting of the Central Bank of Canada

16 July EUR

Meeting and press conference of the European Central Bank

 

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