The Euro

What does 2017 have in store for the currency markets?

Last year proved to be one of great change, and many of these changes had a significant impact on exchange rates. 2017 may prove to be one of even greater change, and how these changes affect exchange rates will be crucial for those with a currency exchange requirement. Let’s take a look ahead to some key events that we think will affect the currency markets, and how you can limit your exposure to them.

Key 2017 events:

  • March 2017 – Article 50 is likely to be invoked. Uncertainty surrounding the uncoupling process and future trade negotiations are likely to weaken sterling and the general consensus is that it’s likely the Pound will fall when this happens.
  • 17th March 2017 – Dutch elections. The Dutch have already voiced a desire for a referendum. A ‘vote for change’ could trigger this, which may weaken the Euro.
  • April/May 2017 – French elections. A right wing win would bring about the possibility of the French having their own referendum and would therefore also be EUR negative.
  • September 2017 – German elections. Unlikely to see Merkel ousted, however a growing number of Germans are unhappy footing the European bill, and if Merkel doesn’t win another term, the Euro may weaken.

Each of these elections could move GBP/EUR rates significantly and have the potential to deliver a blow to the EU, each more severe than the last; the Dutch go first in March, the French in May and finally the German’s in October. With Gert Wilders and Marine Le Pen having surprise leads in some polls for the far right, the single currency could be in for a real shoeing. Conversely, should these three votes go the other way it would be a resounding victory for the EU with Francois Fillon and Angela Merkel being devoted Eurocrats. This would strengthen the Euro and make it more expensive to purchase.

Taking the above into account, there is the risk that GBP/EUR rates may fall in the short term as the UK invokes Article 50. Uncertainty is what has been keeping Sterling under pressure since last June, and while negotiations are on-going this uncertainty could increase. Also, as inflation is expected to rise, in part due to a weaker Pound, goods will become more expensive and consumers may then start to reconsider their carefree approach that currently seems to ignore the economic headwinds. Wage growth is unlikely to keep up with inflation, and the effects of a weaker Pound will be more keenly felt.

On the other hand, the uncertainty may evaporate as it becomes clearer what a post-Brexit UK economy will look like, which could increase business confidence and drive the Pound higher. Political events that I have outlined above will also be a big driver for the value of the Euro, with the potential for it to weaken significantly and pull GBP/EUR rates back up again. So as you can see, GBP/EUR is being pulled in both directions by events both in Britain and abroad, and this metaphorical tug-o-war will be the main driver of exchange rates for the short to medium term.

All this change presents risks for most, and opportunities for many. The only thing that is certain is that 2017 will be more unpredictable than any other year in recent history. With all this uncertainty and constantly evolving situations it is more important than ever to ensure you protect yourself against any adverse movements. Simply leaving things to chance and hoping that exchange rates go up is not recommended.

If you need to convert currency and are worried about rates moving against you, a sensible option to consider is a ‘Forward contract’. This allows you to lock in the current rate of exchange and only lodge 10% of the total that you will need to convert. This removes your exposure to what is likely to be an extremely volatile period, and protects you against the rate falling. Crucially, it allows you to budget effectively.

Alastair Archbold
FX Manager

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