The Brexit-driven EUR/GBP exchange rate opened on Monday at a 3 ½-month low as investors continue to bet on the UK and EU striking a deal. Against the dollar, the euro will be worth as much as 13 percent more next year, according to a new forecast from ING.
With eurozone monetary policy somewhat dull since the ECB signalled in June it would leave interest rates unchanged until the latter stages of next year, Brexit, Italian politics and, to some extent, a Turkish lira currency crisis, have been the drivers of euro exchange rates in recent months.
Although by no means the hardest hit major currency in recent weeks, it is fair to say that the euro has disappointed of late, having fallen in seven of the past nine trading days against the dollar and in nine of the past eleven relative to the pound. The euro traded back below 1.15 dollars on Monday and at a 3 ½-month low of 0.878 pounds.
On the dollar side, the aforementioned euro weakness is the result of a surge in US yields, and versus the pound, the result of a market-wide bet on a Brexit deal being struck by Britain and the EU. Of the two Brexit affected currencies, it has always been the pound, not the euro, that has been sold off whenever the possibility of “no deal” has been raised; it is the pound, therefore, that has the best of it whenever this possibility is reversed.
The euro is heading significantly higher though, write ING’s Viraj Patel and Petr Krpata. The pair retain a “constructive” euro outlook and have their eyes on 1.25-1.30 dollars next year—between 9 and 13 percent higher than current levels.
“The euro should receive a boost from the second step of [ECB] policy normalisation—the deposit rate hikes. But although that’s a story for 3Q19 . . . we expect markets to front-run the event and start pricing that in six months ahead. ECB President Mario Draghi’s comments about the ‘vigorous’ rise in core inflation supports this view,” Patel and Krpata argue.
The pair of analysts also cite the Italian government’s willingness to target lower budget deficits in 2020 and 2021 as a reason for euro optimism—earlier proposals for higher deficits had unnerved financial markets.
On Monday, having achieved the price objective of an important Head and Shoulders pattern, for the first time in a month, EUR/GBP has freedom to climb, on technical grounds at least.