It’s been a tumultuous year for the Pound.
Sterling began 2016 at 1.36 against the Euro and looks set to end it at around 1.17.
GBP/EUR declined rapidly during the first three months of the year as speculative investors hedged against the uncertainty of a vote to leave the European Union.
Then in June, when Britons did indeed vote to break away from the EU, Sterling tumbled from 1.32 to 1.20 overnight.
The Pound continued to cede ground to the single currency during the summer as the Bank of England cut interest rates, restarted quantitative easing and predicted future policy easing.
The Pound to Euro exchange rate hit a low point on October 7, with Sterling temporarily crashing from 1.13 to a seven-year low of 1.06 as market positioning was so strong against GBP that traders were unable to find buyers. GBP/EUR recovered within the hour to settle close to 1.11.
However, from there things started to look up for the Pound.
The depreciation in Sterling started prompting retailers to rise prices to maintain profit margins, which in turn led to a surge in inflation expectations and persuaded the BoE to hold off on further monetary loosening.
When Donald Trump was elected to become the next US President it raised fears that nationalist populism could spread in other western economies and weighed on demand for the Euro. Trump’s reflationary policies also supported the Pound because the ‘special relationship’ between the US and the UK led investors to consider the UK currency as a ‘mini Dollar’.
The Pound briefly rallied back above 1.20 at the beginning of December but GBP/EUR has succumbed to a little bit of a losing streak as we approach the New Year.
The main currency market drivers in 2017, as in 2016, are likely to be political rather than economic events.
General elections in Holland (March), France (April) and Germany (September) are going to be important and we can expect the single currency to soften in the run up to these votes if anti-EU parties are seen to be growing in support.
Brexit will also play a big part in GBP/EUR sentiment. UK Prime Minister Theresa May intends to invoke Article 50 in March and begin negotiating a new trade deal for Britain. If Downing Street decides to try and maintain access to the single market then we could see economic confidence rise and demand for the Pound could increase. However, if government ministers pursue a so-called ‘hard Brexit’ then Sterling could easily lose further ground to the single currency in 2017.
No significant data this week
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