Monday August 14, 2017 - 11:31:25 GMT
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The Euro and the Pound: A Tumultuous Relationship
It is no secret that the EUR/GBP currency pairing has been incredibly volatile over the last year or so, largely due to instability in the global climate/economy. As a result, those investing in forex will be looking to take advantage of potentially lucrative opportunities which are opened up by market volatility. Here are some of the factors which are affecting the euro and the pound.
Elected as president in November 2016, Donald Trump has gained a reputation for being a volatile and unpredictable character. As such, market investors have been forced to approach investments with a hint of caution, although many markets have seen a surge since he has been in office.
His protectionist stance on the US economy could prove dangerous to various economies around the world, including Britain and the EU, as it could mean that trading with the US will become more difficult/less beneficial. Most recently, the tension building between the US and North Korea is putting investors on edge.
Britain’s looming exit from the EU is undoubtedly dominating the behaviour of the euro and the pound, and has been doing so ever since Britain narrowly voted to leave in 2016. Most of the effects have been negative for the pound, which slumped 7% against the euro when the results came in.
Economic forecasts for post-Brexit Britain have been exceptionally gloomy, given that most of its trade routes and business links are located within the EU and Single Market. The most significant effect of Brexit is the uncertainty surrounding it, especially since negotiations have only just begun. Since investors have very little concrete information to go on in terms of the effects of Brexit, they cannot accurately predict future currency behaviour.
It is fair to say that the British economy has not been performing well of late, largely due to the turmoil caused by Brexit. The recent election in June weakened the Conservative government’s grip on power (they did not win an overall majority) and threw another spanner into Brexit negotiations.
This has meant that the euro has been performing well against the pound, although the British currency has since recovered due to geopolitical uncertainty, amongst other factors. It remains to be seen how Britain deals with its incredibly slow growth and political divisions as Brexit approaches.
The election of the pro-EU Emmanuel Macron in France quelled fears that France may follow Britain in leaving the EU, and made a firm statement that the EU is still strong and united. The euro has undoubtedly been strengthened by the election result, and Macron has proven to be popular amongst the French population.
This further halted the pound’s potential for a strong recovery, and Macron’s pro-EU stance means that Britain will face an even more challenging uphill struggle in Brexit negotiations.
After the intense volatility over the last year, it looks as though the pound and the euro have taken steps towards stability, if only for a short time. This will most likely be short lived, however, as continuing Brexit negotiations may cause further volatility as more details about the process emerge.
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