In October politics was the driving force of euro movement, with the Catalan crisis and fallout from the German election keeping the common currency on its toes.
So far, November has proven just as politically charged, with chaos in the UK cabinet leading to concerns that Brexit negotiations may be derailed.
The euro, meanwhile, came under pressure thanks to the European Central Bank’s (ECB) latest policy meeting, while the US dollar remained robust thanks to developments in President Trump’s tax plans and the odds of the Federal Reserve increasing interest rates in December remaining over 90%.
Over the last four weeks the GBP/EUR exchange rate has been fluctuating between €1.1446 and €1.1084, with the pairing trading in the region of €1.1283 by the middle of November.
EUR/GBP, on the other hand, fell from a high of £0.9021 to a low of £0.8736 (recovering to £0.88 at the time of writing) while EUR/USD shifted between $1.1879 and $1.1557.
What’s been happening?
Towards the end of October the euro weakened in response to the ECB’s hotly anticipated interest rate decision. The central bank reduced the size of its bond buying programme, but also extended it to run until at least September of next year.
As interest rates aren’t expected to be adjusted until QE ends, the move was euro-negative.
The dovish long-term outlook for policy helped GBP/EUR march its way to an over 4-month high. However, the Bank of England (BoE) soon put paid to any Sterling strength.
While the BoE increased borrowing costs for the first time in a decade, the Monetary Policy Committee intimated that future changes to borrowing costs would be ‘gradual’ and to a ‘limited extent’ – leaving the pound to fall by as much as 2% against most of the majors.
Sterling recovered some ground on upbeat UK data, but political developments put paid to a sustained Sterling recovery.
Prime Minister Theresa May lost two cabinet ministers in the space of a week as scandal swirled round Westminster, and dark rumblings of a leadership challenge clouded the outlook for Brexit negotiations.
What do you need to look out for?
A continuation of the recent political dramas would, of course, weigh on the pound.
If Brexit negotiations are adversely affected by all the upheaval, GBP could fall to fresh multi-week lows.
Meanwhile, the strength of the US dollar could limit the euro’s upside potential as we march towards December’s Federal Reserve rate decision. As EUR/USD is the world’s most traded currency pairing, the euro tends weaken when the US dollar strengthens.
Unless something happens to dash hopes of a US rate hike taking place next month, the US dollar is likely to remain elevated, keeping the euro under pressure in the process.
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