Brexit, elections in Europe and Donald Trump all have one thing in common, they have the potential to shape Pound to Euro exchange rates throughout 2017. Looking at the timeline of events, the UK’s withdrawal from the EU is expected to begin in March, right on the doorstep of the elections in Holland which markets are already nervous about.
The Dutch elections are followed shortly by the elections in France which are equally as nail biting given the threat of Marine Le Pen, but more so to do with recent events surrounding François Fillon and his wife.
And then there is Donald Trump with his clear message, America first. The protectionist and isolationist rhetoric that could play into the hands of right wing parties, after all, markets remain confident for now that Trump will boost the economy.
So when is the best time to buy the Euro in 2017? The below list will provide some insight into events and the potential outcomes. Due to the unpredictability of all three events this year, there are no guarantees in this volatile market.
Brexit – How will it affect Pound to Euro exchange rates?
We’ve already witnessed the sharp declines in Sterling’s value following the announcement of the result, and so far the impact on the UK economy has been limited. While it is true forecasts overplayed the vote, the longer term implications of Brexit should not be ignored.
The Pound will likely take another hit in the coming weeks, with Theresa May expected to invoke Article 50 in March, further loss of appetite for the Pound could emerge.
There is then the question of definition. The type of Brexit that the UK pursues will likely shape exchange rates. Theresa May has insisted that the UK wants access to the single market as long as any such deal struck will benefit the UK. No deal is better than a bad deal according to May, which signals to markets that the UK may default back to WTO tariffs if negotiations turn messy.
The above scenario is the worst case, and in reality a self destructive Brexit will hurt not only the UK, but its European neighbours. For one, the UK exports 50% of its goods to the bloc, whilst the EU benefit from London’s huge financial hub for Euro clearance.
With this in mind, it’s quite likely some middle ground Brexit will be achievable, perhaps in the form of a free trade deal similar to Canada. The issue then is whether such a deal can be reached in 2 years, and whether remaining EU members will allow for extra time in such an event.
Personally I hold the view that Sterling will begin to climb in Q2, a number of key economies have already discussed the prospect of free trade agreements with the UK which only serve to build Sterling Morale. Furthermore, by April we will have a clear picture of how the Dutch elections went and whether markets should remain cautious to further right-wing surprises.
Elections in Europe: Will there be further surprises?
It was expected that Marine Le Pen would make the second round, only to be beaten by the favourite Francois Fillon. The recent scandal surrounding him and his wife has put big doubts on these predictions.
Another important factor in the French elections revolves around terrorism, just today another Islamic extremist attempted an attack in Paris which only serves to build Le Pen’s campaign.
But what about wikileaks? There involvement in the US elections helped to boost Trump’s odds, and with concerns that they may turn heads at the French elections, a similar scenario may play out for Le Pen.
If the French National Front did when the French election, I predict the Euro to crash and the future of the Eurozone to be in serious jeopardy. The EU faces difficult roads ahead with the UK, to do with France as well could be the nail in the coffin.
Who could Trump upset next?
It’s perhaps an easier task to compile a list of countries the President hasn’t upset in some shape or form. If it’s not Mexico and the wall that ruffled feathers, his conspiracy theory around global warming being a Chinese hoax certainly did. Under normal circumstances these beliefs would likely cost you any hopes of a US Presidency, but not for the billionaire Tycoon.
In fact, the President has gone on to execute orders that have reached global criticism. His decision to ban entry to the US by 7 countries caused outrage from London to Melbourne. The list of controversial comments come in on a daily basis.
Just look through Trump’s twitter account and you’ll have some idea of what to expect. The ‘worst call ever’ with the Australian PM, doing away with banking regulations that protect consumers, accusing the Chinese of currency manipulation. The most powerful man on earth is using social media to rant like an angry school child.
Never underestimate the potential impact this could have on the global economy, in the words of Donald Tusk the EU President, ‘Trump is the biggest risk to the EU’.
Those hoping for further US Dollar strength should proceed with caution, the US Dollar will be pegged against political events that emerge under Trump and it could spell bad news for USD exchange rates.