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December 18, 2016

5-Day GBP/EUR Exchange Rate Hangs on Italian Referendum

Pound Sterling to Euro climbs to multi-week high ahead of high-risk Italian Referendum and the Article 50 appeal hearing at the UK Supreme Court. The short, medium and long-term Pound to Euro exchange rate is looked at.

Many forex traders on sites such as CMCMarkets that are sitting on Pound Sterling have enjoyed the almost 12-week high in the GBP/EUR exchange rate. With the increasing chance of a soft-Brexit, the outlook for the UK after leaving the EU has dominated the markets in recent weeks.

The Pound Sterling has been boosted in market confidence by the comments from David Davis, Brexit Secretary, saying that UK may be able to pay in order to keep its current single market access level in the EU. However, volatility in the GBP/EUR exchange rate is expected as the outcome of the Supreme Court appeal nears – the appeal on whether Parliament can trigger Article 50 with a vote.

If the Italians vote ‘no’, the Pound Sterling may open drastically higher against the EUR. The EUR will suffer from the political vote on the constitutional referendum which is seen as a political risk for the entire Eurozone post-Brexit.

The voters are expected to reject Prime Minister Matteo Renzi’s reforms, prompting his resignation, then the single currency appeal will most likely diminish creating more regional uncertainty. The European Head of GMR, Derek Helpenny said that even with a surprise ‘yes’ vote is not necessarily going to be positive as it seen as a double-edged sword. The 5 Star Movement will be ultimately be helped if the lower house of parliament is strengthened, all at the expense of the Senate, especially if they get the expected win in the upcoming general election in 2018.

The rally point for the GBP/EUR exchange rate could be as a result of the UK Services PMI. The UK Services PMI in November is expected to increase the sector expansion, rallying the Pound Sterling against the Euro.

Investors favour the Pound Sterling, regardless of what happens with the uncertainty surrounding Brexit, as long as the domestic economy continues with its current resilience. However, if there are any signs of disappointment in the domestic expansion, it is likely going to have a major impact of the resilience of the GBP/EUR exchange. This is due to the fact that the service sector is a major part of the UK’s GBP.

Even though the Eurozone retail sales increased considerably in October of this year – from 1.1% to 1.8% - odds of further European Central Bank easing is not likely going to change. Even if there is a strong showing, the ECB will most likely still extended its easing program at their policy meeting. The GBP/EUR exchange rate will likely be boosted by the expectation of a dovish ECB meeting as well as the expected interest rate hike from the Federal Reserve.

There are a number of events that are set to take place in December that will impact both the USD and the EUR, creating high-risk situations. UBS said that the events including the Fed, ECB, SNB, BoE and BoJ policy rate meetings and the Italian Referendum will have a major impact on the foreign exchange markets. UBS went on the say that the Article 50 ruling by the UK’s Supreme Court will be another key factor to FX markets. The trajectory of inflation and political developments in the US will be a driving factor in the rates markets.

Over the next seven days, several EUR-impacting political events are going to occur. Among them are the Final Services OMI, the German Final Services PMI, the Eurogroup Meetings, the Retail Sales and the Sentix Investor Confidence. Further impactful events include the German Factory Orders, the Italian Services PMI, the French Final Non-Farm Payrolls, the Minimum Bid Rate, the French Trade Balance and the ECB Press Conference.

The events that could have an impact on the GBP over the next seven days include the BRC Retail Sales Monitor, the BRC Shop Price Index, the PFC Meeting Minutes, the Halifax HPI and the 10-year Bond Auction. Further events to come over the next few days include the RICS House Price Balance, the 30-year Bond Auction, the Manufacturing Production and the NIESR BDP estimate.  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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