By Admiral Markets
As you may have seen in our previous article, Brexit has more than a long-term impact – there are also mid term implications.
This article is dedicated to looking at the financial markets after Brexit, with a focus on the euro / sterling (EUR/GBP) forecast.
The EUR/GBP is among the most popular and traded Forex pairs across Europe, since it connects the two largest economies of the EU (or soon non EU?) zones.
Brexit and EUR/GBP
Deutsche Bank’s chief executive John Cryan does not favour the idea of Brexit.
Cryan has been a strong supporter of the EU project and admits there will be uncertainty in the EUR/GBP forecast.
Let’s not forget that we could have witnessed a strong upside reaction on the EUR/GBP pair, after the Brexit vote.
In assessing bilateral trade between various Eurozone member nations and the UK:
…Ireland, Netherlands and Belgium seem most exposed to a Brexit.
There have also been media reports that Deutsche Bank has set up a working group to assess whether London business should be returned to Frankfurt, in case of a Brexit.
Other international banks have mentioned contemplating a partial move from their London offices too, back to the continent in the case of Brexit.
Furthermore, industries outside finance may also move to the continent if trade terms are adversely affected by Brexit.
Another direct economic impact from a Brexit on the rest of the EU, could be the contributions to the EU budget made by EU member countries.
As the UK is one of the net contributors to the EU budget, all other countries would have to contribute the missing money.
The largest burden would be on the larger EU member economies, with Germany having to pay an additional EUR2.5bn on top of current EU30bn contributions to the EU budget.
EUR/GBP effect on summer holidays
This summer will mark a change for British tourists heading abroad.
They should feel the effects of a vote to leave the EU, but they shouldn’t expect to see any major changes to their holiday.
For travellers, the immediate impact comes in the form of spending while abroad.
It now costs more to buy foreign currency like the euro, after the pound tanked – hitting its weakest level against the US dollar in 31 years.
My advice for UK-based travellers is to carry a prepaid travel card, which will avoid carrying cash and cover your transactions.
You can also use these travel cars to lock in an exchange rate for a particular day.
Latest ECB meeting and EUR/GBP
Representatives of the world’s biggest economies met over the weekend at the G20 meeting.
These countries are focused on working toward supporting global growth and better sharing the benefits of trade, but:
…this meeting was dominated by the impact of Britain’s exit from Europe…
…and fears of rising protectionism.
Protectionism is a term that describes when countries raise taxes on imports to make their domestic products more competitive i.e. to protect their domestic economy.
Despite this, GBP has witnessed recent strength due to oversold conditions resulting from the Brexit vote.
While Article 50 has not been submitted to the EU by the UK, the reality is that the Brexit is most likely to occur.
This has created some uncertainty on the EU project as a whole and as a result, the euro has lost some of its shine.
On the topic of shine, gold has staged a drop in value as the general risk-on mentality prevails in more risky markets like property and equities.
…there seems to be a strong positive correlation between the EUR/GBP pair and Gold…
…as H4 200 bars using Admiral Markets correlation tables stands at +94%.
So generally during risk-off:
- Gold is popping as a safety trade, and
- JPY and EUR may be going up, while
- lots of red colour can be found on the stock traders screens.
This is fundamentally supported by the fact that the UK has lower gold reserves (in its foreign reserves) and therefore less exposure to the precious metal, than the EU.
Things can change over time of course, but right now:
…euro has been going up in risk off.
The following video shows how Forex pairs and EUR/GBP were moving during the recent conference.
EUR/GBP short to mid term forecast
On the daily chart, we see EUR/GBP could form a head and shoulders pattern that could bring the exchange rate down.
Due to impending holidays, investors might take profits on EUR/GBP longs and the pair could correct to the downside.
0.8112 and 0.7990 look interesting to buy EUR/GBP:
…and if the exchange rate breaks…
…0.8625 should reach 0.8770 or even 0.8850-0.9000.
Overall, there could be a bullish range in play as investors wait for the UK to implement Article 50 and begin leaving the European Union.
Liquidity is also reduced by market holidays and there are always seasonal periods of reduced market interest e.g. during late summer.
Markets tend to be inert and remain confined to ranges.
The risks also increase for sudden breakouts and major trend reversals, so don’t be unprotected from higher volatility during holiday markets.
As I have have always said, calculate the risk before you make the trade.
Cheers and safe trading,
Article by Admiral Markets
Source: Post Brexit effect on EUR/GBP
Admiral Markets is a leading online provider, offering trading with Forex and CFDs on stocks, indices, precious metals and energy.