Published On: Tue, Jan 10th, 2017

How the EUR/GBP has Started 2017

It’s fair to say that the EUR/GBP currency pairing experienced a tumultuous year in 2016. The start of the year wasn’t so bad, but when the UK’s EU membership referendum was announced, and then the result came in, everything changed.

Deciding to leave the EU introduced a lot of uncertainty into the financial markets, as both the pound and euro dropped in value, though it did provide a lot of opportunities for forex traders. Since then both currencies have recovered somewhat, and the pairing has made a decent start to 2017 but with plenty of uncertainty still on the horizon.

Strong Eurozone Data

There has been a lot of strong data coming out of the Eurozone in the first week or so of 2017, which has boosted the EUR/GBP pair. Eurozone unemployment has remained steady at 9.8%, while year-on-year production grew 2.2% rather than the predicted 1.9%. The same data showed exports increased by 3.9% compared to a forecast of 0.5% from October too.

Data from the UK has also been fairly strong, with the manufacturing industry enjoying a strong start to the year. With positives for both sides, this has helped push up the EUR/GBP exchange rate to make it bullish rather than bearish.

Hard Brexit Speculation

Ever since the UK decided to leave the EU there has been a lot of ongoing speculation as to how it will happen, when it will be and more. Most predict either a hard or soft Brexit, depending on what happens during negotiations, with speculation growing for the former.

Hard or Soft Brexit?

In the first week of 2017 Prime Minister Theresa May hinted that a hard Brexit may be pursued, which would entail the UK leaving the single market and all other membership obligations. In light of such signals the pound fell about 1% across the board, to a two-month low and sending forex traders into a flurry of activity. This is a blow for the EUR/GBP pair, as both currencies are greatly affected by Brexit negotiations and the pair could perform poorly if there is a hard Brexit.

Outside Influences

Other currencies have an influence on the EUR/GBP pair, most notably the US dollar. In the aftermath of Brexit, it was the biggest winner, making gains against both the British pound and euro. US monetary policy remains a threat to the Eurozone with a Federal Reserve rate hike expected for later in the year.

As there is a lot of trade between the UK, EU nations and the USA, an increase in rates will have a knock-on impact for the currencies. A hike is not expected until June, so at the moment such outside influences are having little effect.

Future Impacts

Ongoing Brexit negotiations will have the biggest impact on the EUR/GBP currency pair. Negotiations are expected to be underway by March, but whether a hard or soft Brexit is worked out, the pairing will likely weaken due to the uncertainty it will provide anyway. There are also worries that there could be trouble for the Eurozone in the near future, especially if Brexit is a success, with financial worries for Greece and other nations still at the back of many EU minds.

The EUR/GBP pairing has made a decent start to 2017 considering its volatile last year, but there are plenty of challenges up ahead.

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About the Author

- Robert is a private trader with over 15 years experience trading the financial markets.