The global economy has undergone a great deal of turbulence in the last year, with numerous economic and political events shaking up a variety of markets.
Those trading forex will no doubt have had their eye on the market movements of the pound and the euro as the currency pairing has been particularly volatile recently.
Whether the pound will reach parity with the euro remains to be seen, so here are some of the factors which are affecting the value of each currency.
Brexit
The most significant factor which has been affecting the pound to euro exchange rate is Brexit. Since the referendum in 2016, which saw the pound crash 7% against the euro, the pound has failed to recover, and has in fact been on a sustained downward spiral against its European counterpart.
Since Britain will most likely be leaving the Single Market, there is much uncertainty as to how its trade will be affected and to what extent the economy will suffer. Most of the financial forecasts are gloomy, and negotiations have only just got underway, meaning that there is much more uncertainty to come.
ECB
The European Central Bank exists to discuss monetary policy for the Eurozone, and as such has major influence over the short and medium term market movements of the euro. Every time information is released on an ECB meeting, it nearly always has an effect on the euro and the pound, given that their policies affect the economies of all the countries in and around the Eurozone.
It could well be the case that future ECB decisions have a bearing on the pound/euro exchange rate as they take measures to ensure stability for the European currency. Most recently, they have had to deal with the euro strengthening against the dollar, which could affect inflation moderation.
Economy
It is no surprise that the British economy has been one of the worst performing in the world since the Brexit vote, with growth standing at just 0.2% in the first quarter. In comparison, many countries in the Eurozone have seen their economies grow and strengthen, despite Britain outperforming many major countries before the Brexit referendum.
Inflation has been eroding wages in Britain, leading to reduced consumer spending and forecasts of a potential recession in the next year. This could easily cause the pound to reach parity with the euro, and perhaps even fall below parity if the economy does not pick up soon.
Politics
Due to geopolitical and economic turbulence, the world has become an incredibly divided place, and this has the potential to have major repercussions for numerous global economies. With the election of Donald Trump, a divisive and volatile character, and the British election taking away the Conservative government’s parliamentary majority, it is clear that national and international unity is approaching a low point.
These political divisions could well damage confidence in the economies of various countries, further hampering their ability to trade and grow, and lessening Britain’s chance of making economically healthy trade deals post-Brexit.
The Future
If the last year has taught us anything, it’s that political and economic events are becoming increasingly hard to predict, and as such global markets are now very susceptible to volatility. It makes sense that the euro and the pound are headed for more turbulence, as the current climate of uncertainty continues to pervade Britain and the EU.
Once the Brexit negotiation process produces some answers as to the nature of Britain’s exit from the EU, and economic uncertainty settles down, the direction of the pound and the euro will become clearer. For now, it seems as though there is a high possibility that the currencies will reach parity soon, given Britain’s poorly performing economy and grim economic forecasts.
