The difficulties that lie ahead for both the UK and Eurozone, could present huge fluctuations for the currency pairing. On the one side, the UK faces the untangling of 4 decades of EU integration, on the other, a political maelstrom which could be set to change the course of the Eurozone entirely.
Brexit isn’t just going to affect the UK, the huge void that it leaves behind for the Eurozone could lead to huger implications elsewhere. A reminder of what happened in 2007 and 2008 when the Global financial crisis struck the World by surprise, with much of the blame at the hands of the Lehman Brothers.
A similar scenario in the single market could have equal implications of that of almost a decade ago. The Eurozone being a 28-blog state, and of almost equal GDP to the US, faces a wave of political and economic hurdles in the wake of Brexit and Trump.
It may seem almost impossible to predict which way GBP/EUR exchange rates will sway in 2017, but of what little we do know at this stage, the Pound will face the first hurdles in Q1, with the European elections set for Q2 and Q3.
The real Brexit
The outcome of the Supreme Court hearing could either prevent the Government from Triggering Article 50 alone, or allow them to embark on whichever Brexit they see fit. It has been suggested that this could result in a hard Brexit, which in the view of many, could wreck havoc on the British economy.
With the outcome expected in January, the Pound faces its first challenge of the New Year and regardless of the outcome, investors will become nervous in the early weeks of January which could lead to a dampening of Sterling’s sentiment.
What then awaits the UK in March is the real Brexit, the formal process of cutting its ties with the EU and beginning the negotiation phase. The Pound’s fate will hang in the balance until we learn more of what Brexit really means.
There are many if’s and but’s, what if the UK opts for a soft Brexit, or a transitional phase? What if Parliament scrutinise May’s exit strategy and prevent her from invoking Article 50? These potential outcomes could provide movements both in and out of Sterling’s favour.
European election anxiety
Markets were left stunned when the UK woke up to a victory for the Leave campaign, just hours prior to the results Pound Sterling rallies were out in full swing with almost every poll suggesting a comfortable lead for the Remain camp. A similar scenario ran its course in the US when what looked like a win for the Democrats, turned into yet another shock win for the markets. The difference being that a Trump victory was not all seen as such a negative outcome for the US Dollar.
The fact remains however that polls and bookmakers a like have been on a losing streak. A new political era appears to be emerging and no mathematical equation or scientific model has any way of predicting a vote driven by human emotion, that being, both Trump and Brexit being an angry protest vote.
The same scenario could therefore unfold in France, Marine Le Pen, and Germany, who have a slight distaste towards Merkel’s refugee quota. Investors are not going to be taking chances after being caught out twice, why would they when the US have the potential for 3 US interest rate hikes next year?
It seems almost unimaginable that 2017 could result in significant changes for the Global economy, those with a currency requirement no matter how big or small may be prudent to protect their position ahead of a huge unknown.