“EUR will continue to reign supreme in the absence of any evidence that the ECB is worrying about the impact of the FX appreciation on the economic outlook”
Above: Benoît-Cœuré, (c) ECB.
- Pound to Euro exchange rate today (14-7-17): 1 GBP = 1.1349 EUR
- Euro to Pound Sterling exchange rate today: 1 EUR = 0.8809 GBP
- Euro to Dollar exchange rate today: 1 EUR = 1.1382
This is something of a purple patch for the Euro.
The currency is 2017’s undisputed king with advances being registered against all its ten major competitors with a whopping 8.56% advance coming against the Dollar and a 4.06% gain being registered against Sterling.
For those wondering what the future holds, I would say that based on momentum alone it would be wise to expect further gains by the single currency.
Furthermore, the Euro is notably undervalued on a long-term basis and should be trading higher thanks to Germany’s impressive export engine.
However, the European Central Bank’s policy of printing money and keeping interest rates at record-lows have undermined the currency for years now.
But, the ECB is now looking to end these Euro-negative policies and the currency has responded accordingly and might finally be embarking on a journey back to fair-value.
The Euro will be Allowed to Run Higher by the ECB
A big question regarding the Euro's next moves lie with the ECB.
Are they happy with its recent appreciation? After all a stronger Euro makes Eurozone exports more expensive to the rest of the world which could weigh on activity. Furthermore, a stronger Euro makes imports cheaper which would be expected to weigh on inflation ensuring the Bank's 2% inflation target becomes more threatened.
This week we have seen the Euro record fresh multi-year highs against most majors following the release of a speech by the Executive Board member Benoit Coeure on the international impact from the ECB's QE programme in which he appeared to turn a blind eye to the currency's strength.
“From an FX point of view, key for the markets seemed to be the statement that the EUR weakness that accompanied the launch of the programme was not a policy objective in itself,” says Valentin Marinov, Head of G10 FX Strategy at Credit Agricole.
Is this a signal that the ECB is okay with the Euro rising as it has?
After all, in the past there have been suspicions that the ECB has actively sought to ensure the Euro stays at competitive levels as it keep inflation elevated and aids the export of European-manufactured goods, just think of German cars.
“We also think that the markets responded the way they did because the speech made no mention of the latest EUR-appreciation and was therefore seen as a tacit endorsement of the price action in the FX markets,” says Marinov in a briefing to clients dated July 12.
So, does the ECB care about the EUR?
“We still think that the answer is yes, even though we have to admit that we were expecting the Governing Council members to be more proactive in voicing their discomfort about the extent of the recent EUR-appreciation already,” says Marinov.
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Credit Agricole still believe that any sustained currency gains from here could pose a clear downside risk to the Eurozone inflation outlook in the next 6M-12M especially given the worsening outlook for oil.
So those watching the Euro and betting on further gains must be wary of this.
The ECB might fight back and extend its quantitative easing programme if inflation rates fall dramatically, something that would certainly have a positive impact on the value of the single currency.
“In addition, further unwarranted FX appreciation will only add to the ongoing tightening in the Eurozone financial conditions on the back of the mini 'taper tantrum' in the EGB market,” says Marinov.
However, Credit Agricole are positive on the Euro’s trajectory from here and we see this as being suggestive that the Pound / Euro rate will continue to struggle for months to come.
The Pound has recently hit an eight-month low against the Euro and could well be on the way to test the 1.11 area in coming weeks.
“In all, EUR will continue to reign supreme in the absence of any evidence that the ECB is worrying about the impact of the FX appreciation on the economic outlook,” says Marinov.
Looking ahead, the July ECB meeting next week could provide the best venue to express any such concerns.
Further, it is suggested the ECB is not necessarily out of options when it comes to containing the currency rally in the near-term.
“Indeed, we suspect that any potential delay of the QE taper announcement could serve as a dovish surprise to the EUR-bulls,” says Marinov.
Credit Agricole are forecasting the EUR/GBP exchange rate to trade at 0.87 by the end of the year where the rate should stay at until the end of the forecast horizon in March 2018.
This equals a Pound to Euro exchange rate at 1.1494.
Euro Dollar Forecast
Meanwhile, the EUR/USD exchange rate is forecast to more or less hang around current levels into the end of the year according to Credit Agricole's projections.
Analysts see EUR/USD trading at 1.12 by December, where it will likely stay until March 2018.
Repeal Bill to Test UK Political Stability and the Pound
Another political test confronts Pound Sterling - which now trades as a political currency in many respects - is the publication and passage through parliament of the Repeal Bill.
Publication is slated for today.
The bill seeks to convert EU law into British law and is a fundamental cornerstone in the UK’s exit from the European Union as it is required to legal stability.
Secretary for Exiting the European Union, David Davis, says he will "work with anyone" to make it a success, but he faces opposition.
Liberal Democrat leader Tim Farron told the government: "This will be hell."
Labour vowed to vote against the legislation unless there were significant changes to the details previously set out.
But, the Conservative Government have the Northern Irish Democratic Unionist Party at hand to support them which should see them win key votes, such as the passing of the bill.
But, any hiccups, stalling or outright failure on this front will surely undermine the UK currency, so keep abreast of developments here.
On a more constructive note, the UK’s Trade Secretary Liam Fox says the Government will seek to ensure no disruptive Brexit occurs in 2019.
Talking to Bloomberg, Fox says:
“We are under time pressure to get negotiations done, but if we have to have some kind of bridging mechanism that allows us greater time to get it right then of course we will look at that.”
Market continuity is a key issue for UK businesses as it allows the stable background from which to make investment decisions and is therefore good for the economy.
What is good for the economy is good for the Pound as a layer of uncertainty and the prospect of the UK defaulting into WTO rules are negated.
Macron, Trump Meet, Look for Questions on Trade
On the Eurozone front, all eyes are on the meeting of France's Emmanuel Macron and US President Donald Trump.
Trump is in Paris for Bastille Day celebrations but markets will be watching the two leaders for signs of discord.
Trump's withdrawal from the Paris Climate deal will be of contention, but for us any mention of the Eurozone's large trade surplus with the US would be of more interest.
If brought up it could focus minds on US protectionism going forward and question the future of the Trans-Atlantic Trade Partnership which Trump has put on the backburners.