It’s now accepted by most, that the Government will push ahead with its Brexit timeline in March, beginning the process of leaving the European Union within the subsequent two years that follows. The outcome of the Supreme Court hearing no longer hinges on the timing of Article 50, and with the majority of Parliament’s backing in exchange for Brexit plans from the Government, the Pound could be tested once again in the early stages of 2017.
That being said, there remains opportunities for the Pound to gather momentum, the recent Italian Referendum resulted in more headaches for the Eurozone, and more specifically the many banks in Italy on the verge of collapse in their current form. Further bailouts and an extension to the ECB’s QE programme have all assisted in balancing GBP/EUR, with rates now considerably better than the lows witnessed in early November.
Near events could strengthen the GBP/EUR position even further, tomorrow’s Consumer Price Index release, a measurement of inflation is expected to post noticeable gains compared with the month of October. While the Pound could post further gains if the data bears positive, higher inflation as a result of a weaker Pound should never be viewed as a long term positive trend.
That being said, a positive release could put the Pound on a stronger footing against the Euro for now, but least not forget the potential implications of Governments plans in March. Leaving the EU is one thing, but leaving the customs union has far more implications for the UK economy.
US and UK interest rate decision
The US could be set for its first interest rate hike this year, after an initial announcement of 4 for the year 2016, markets have already priced for the most part, a rate change of at least .25% at the FED’s briefing on Wednesday. The relationship between the Euro and US Dollar is quite significant, when one strengthens the other tends to weaken, and a stronger Dollar vs a weaker Euro could strengthen the GBP/EUR position.
But as the dust settles on the potential US interest rate hike, the following day provides the Bank of England’s interest rate decision.
Given the warnings issued by the Bank of England’s Mark Carney on the subject of higher inflation, its unlikely that further interest rate cuts will materialise in the near term, but further extensions to the QE programme could be on the cards if deemed necessary.
Realistically, how long are these gains likely to hold out? The UK remains in Brexit limbo for now, but come March next year the UK will officially begin its divorce from the EU presenting further vulnerability for Pound exchange rates. But in the very short term, Pound to Euro exchange rates could well hit 1.20 as we approach the end of the year.