GBP/EUR – Is parity a possibility? (Daniel Johnson)

GBP EUR Exchange Rate: Weekly Review July 16  

MPC vote change weakens Sterling

Sterling continues to fall in value against the Euro. The latest catalyst in it’s fall, the UK interest rate decision. The interest rate is closely linked to inflation. Inflation is currently a major concern for the UK at one point bordering on 3%. Since then we have seen a drop to 2.6%, some believe this to be a negative for the UK economy. I however disagree, inflation is only beneficial if average wage growth is moving at a similar pace, it currently isn’t sitting at 1.8%. This is when there is the danger consumers will cease to spend at the same rate due to inflated prices and income not rising at the same speed.  This does have the potential to cause a recession.

The Bank of England (BOE) have stated there is the possibility of a rate hike should inflation rise above 3%, so the fall to 2.6% was seen as negative to investors and Sterling has fallen as a result. The previous rate vote from the monetary policy committee (MPC) came in at 5-3, with three members on favour of a hike. Since then Kristin Ford has left the MPC and has been replaced by Silvana Tenreyo who voted to hold rates. The vote now at 6-2 did little to help the pound against the Euro.

The Euro zone is actually experiencing wide spread growth both in industry sectors and geographically. Mario Draghi the head of the ECB  has even hinted at tapering the current QE program. QE is essentially pumping money into an economy to stimulate growth. It is currently set at €80bn a month if there was a reduction expect a substantial rise in Euro value.

In order for Sterling to rally we need a stable government and a clear Brexit stance. Although a rise in inflation could force the BOE’s hand on a rate hike it is not a healthy move for the economy. I am not of the opinion we are not going to see parity short term, but there is room for further falls. You need to be in touch with an experienced broker if you wish to maximise your return.

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