The relationship between GBP/EUR faces some interesting months ahead with the double threat of Brexit and a recovery from the economic ravages of COVID.
Both the Eurozone and the UK have taken a battering; the former losing 12% of GDP since the crisis began while the UK had a staggering 21% reduction of GDP from Q1 to Q2. Now there are signs that the tentative reopening of businesses has been positive for the UK. Retail sales for August are at the same level of this time last year and GDP growth forecasts for Q3 are around 14%.
The Eurozone is not showing the same promise. While German growth figures are positive the bloc as a whole is on very shaky legs. The usual suspects in Southern Europe; Italy and Spain especially, have soaring debt and no sign of growth recovery. The European Recovery Fund hashed out last month has papered over the cracks but the disparity between the Eurozone nations is significant. This means that a coherent and effective plan for economic recovery will be very difficult to action and will weigh on the Euro.
Furthermore, the Eurozone’s large export economy and huge debt burden means that a very strong Euro is not necessarily desirable. A cheaper Euro will drive will encourage export and enable their debt to be serviced, not to mention encouraging tourism which is vital to many southern European nations.
The UK, however, faces the storm cloud of the impending Brexit decision which puts a dampener on any positive news from the economy. This will weigh on sterling until a decision has been finalised and a clearer picture of the post-Brexit economy looks like.
Last week Barnier announced that little progress has been made with negotiations. While this negative announcement did not leave a lasting impression on sterling, last years Brexit furore shows that as we get closer to B-Day sterling historically suffers from lack of certainty.
The pound is currently undervalued compared with pre-COVID levels, however, it has a mountain to climb and bad weather ahead in the short term.
Contributed by Ralf Martyrossian – Ralf is a Business Development Manager at Privalgo, specialising in partnerships and property transactions. Along with a passion for financial markets and economics, Ralf is also an English Literature graduate from the University of Bristol. Besides from analysing currency charts, in his spare time, Ralf enjoys boxing, cycling and cartography.
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