Hard-Brexit Chat Sees British Pound to Euro Exchange Rate Destined for Lower Levels

pound to euro 1

Pound Sterling remains under pressure against the Euro as the spectre of a 'hard-exit' from the European Union that makes no attempt to be part of the single market appears to be gaining in popularity.

  • The Pound to Euro exchange rate today (21 Sept 2016): 1.1642
  • The Euro to Pound Sterling exchange rate today (21 Sept 2016): 0.8591

GBP trades sharply lower against the Euro despite the rest of the global FX market remaining steady ahead of the US Federal Reserve policy meeting due at 7PM UK time on Wednesday the 21st. 

We have heard reports that some of the selling could be algorithmic in nature - i.e inspired by technical considerations within trading programmes.

This explains why the most recent slump has no discernable newsflow behind it.

The Pound has nevertheless been under pressure for days now with a sharp decline coming on the previous Friday when it was reported the Chancellor of the Exchequer, Philip Hammond, said that the UK is ready to give up membership of the EU’s single market if it is the price of controlling the country's borders.

This suggests the bar has been raised when it comes to UK businesses having access to the European market and makes for a more drawn-out negotiation process as an 'Hard Brexit' is sought.

The issue of control of the UK's borders is paramount for many UK voters and many believe the government's reputation will be be judged on its ability to return control of its borders.

Nevertheless, the possibility of an exit from the single market as well as the EU has increased the economic risks associated with Brexit, with the result that the pound has weakened.

There is a risk that the UK sees reduced foreign investment into the UK as companies would look to have a foothold in an EU country instead of the UK, where it could have freer access to the common market.

It was also mean an end to the UK’s EU financial passport which allows it to sell financial services uninhibited anywhere in the EU, and this could spell the death knell of London’s dominance as the financial capital of the world.  

However, ratings agency Moody's has just released a report saying that if Britain leaves the single market and the EU the impact on the City of London would be modest and manageable.

According to Moody's:

“The greater impact would be felt through higher costs and diversion of management attention, as the companies concerned restructure, reducing profitability for a time. This is credit negative but manageable. And other critical factors such as capital and liquidity, which are largely determined by global standards, are unlikely to face material changes due to Brexit per se.”

Deeper Losses Ahead say Danske Bank

With regards to the outlook for the remainder of 2016 we are told to expect further weakness in the Pound against the the Euro.

Danske Bank have updated clients with their latest forecasts and say they see GBP weaker thanks to further Bank of England easing and also the considerable imbalances in the UK economy, not least the significant current account deficit.

"In addition, net foreign debt accumulated through several years of current account deficits has made the GBP very fragile. The political uncertainty has declined for now but is lurking beneath the surface and will weigh on GBP when Article 50 is triggered," say Dankse.

Danske forecast the Pound to trade at 1.15 in the 1-6 month timeframe.

Technical Outlook for the GBP/EUR: Resumption of the Move Lower

From a technical perspective the short-term (4-hr) chart of GBP/EUR illustrates how the pound is weakening against the euro due to these concerns, as it describes a descending channel lower.

The exchange rate will probably continue to fall, and although it is bouncing back now, it will probably stall and rotate at resistance from the monthly pivot at 1.173, before resuming its descent.

A move below the 1.1700 level would confirm a resumption of such a move lower, to an initial target at 1.1650 lows.


GBP Upside to Remain Limited, Fed Will be Key

Sterling followed up its worst week in more than a month with a gain but upside looks questionable after the Bank of England last Thursday sounded ready, willing and able to ease monetary policy further.

:More stimulus from Britain and less from the U.S. would be a recipe for a meaningful leg lower in GBPUSD, potentially putting in play fresh lows for a pair that plumbed a 1985 bottom in July below 1.28," says Joe Manimbo, an analyst with Western Union.

A lack of much U.K. data this week will see GBP/USD look for a catalyst in the Fed’s midweek announcement.