It has never happened before. It came close at the height of the financial crisis but the Euro has never reached parity with the sterling.
However, as the EUR/GBP trades at its highest level since the sterling suffered from that famous flash crash during October last year, the market is once again speaking about the possibility of a parity between the two currencies.
The fact of the matter is that the EUR/GBP has enjoyed a fantastic bull run over the last four months with many analysts believing that the momentum will not stop.
So what is driving the Euro higher against the great British pound?
The obvious answer is the concerns over the Brexit and of course that is true but it is not the only driving factor. The fact of the matter is that we are seeing a huge rise in confidence in the EU which started in May.
What happened in May?
Well a certain Emmanuel Macron won the French Presidency which distinguished fears that his closet rival Marine Le Pen would win which would have signaled the end of France being part of the European Union and that could have very likely been the end of the EU bloc.
Up until that result there was real fear that more and more nations would take a leaf out of the UK’s book and leave but that danger was averted.
Along with Macron’s win we have seen huge strides in economic improvement within the EU, with even the ever dovish Mario Draghi changing his tone on the state of things. Speculation is rife that in the immediate future the European Central Bank (ECB) will even start to cut back on its quantitative easing program.
Across the channel, we have seen the opposite over the last four months. For sterling, things have been going downhill. First there was the disastrous UK election result which weakened Theresa May and her Brexit negotiation team’s position. We have also seen a slowdown in Economic growth for the UK and though inflation is way above the current Government’s target, the belief that the BOE will raise interest rates this year has almost completely vanished.
So, will we see the Euro finally reach parity with the world’s oldest currency?
In my opinion no.
Brexit concerns are all very real, but at the end of the day no one in London or Brussels really wants divorce negotiations to collapse. By all means we will have months and months of fallouts and members on both sides digging their proverbial heels in, but eventually a deal with be made.
Once this happens I believe we will see the pound gain investors’ confidence once again. Perhaps not reach its previous strength before the Brexit vote last year but I certainly see it stabilize. Another reason for the GBP being allowed to catch its breath is though there are signs of economic slowdown in the UK, there are other indications that foreign investment may start to rise.
Finally, though I do not believe we will see an interest rate hike in the UK this year I do think we will see one early in 2018 once we have a clearer picture on how Brexit negotiations are panning out and the Bank of England (BOE) can no longer ignore inflation levels.
At the end of the day, the UK is certainly in more of a position to be able raise interest rates a lot sooner than the ECB can.
I can also see hurdles facing the EU; Macron has certainly brought confidence for both France and EU economic recovery, but he faces an uphill battle to make the necessary changes to France’s Labour laws, changes he believes will spur growth and employment in France. Failure here would see France slip back once again.
Another reason, is what Draghi could do in the next ECB press conference on the 7th of September. Many analysts, myself included, believe there will be a potential verbal intervention by Mario Draghi to slow down the Euro’s appreciation. I cannot see a total reversal for the Euro but the pace of the Euro’s rise against the GBP and indeed the USD is decreasing.
And that is why I cannot see Parity becoming a reality for Euro and GBP, because some things are never meant to happen.
By James Trescothick, Senior Global Strategist at easyMarkets
James Trescothick is the Chief Global Strategist at easyMarkets and has over 20 years’ experience in the financial service industry. Initially working as an IFA in the UK where he specialized in commercial mortgages and pensions, James moved into the trading arena 12 years ago when he ran a sales floor at the Philippines Stock Exchange. Having been an active trader for many years for a commodities broker through the DGCX in Dubai, James uses his experience and knowledge to educate traders on the market and is a well-known public speaker who often represents easyMarkets at international industry events.
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