Latest Currency News in Europe

  • ECB may raise interest rates ‘sooner than expected’
  • EU rejects Italy’s budget
  • Brexit is 95% complete
GBPEUR hit a monthly low of 1.11999 on 27 October as the Euro was bolstered by news that the S&P ratings agency retained its outlook for the Italian economy, joining rivals in declaring that Italy is above the junk line. In addition, reports suggested that Italy might be looking to cut spending in 2019 – although this turned out to be not the case when it later presented its controversial budget to the European Commission. The high of 11 October of 1.14508 came as the UK looked to be closer to reaching agreement over Brexit. If a deal is reached – and, as we discuss, it looks close – then the Pound should benefit, assuming the terms are not too onerous.

ECB may raise interest rates ‘sooner than expected’

Market commentators have started poking their heads above the parapet and predicting that the European Central Bank could raise interest rates sooner than expected. Several finance experts believe that rising inflation and increasing rates around the world could see the EBC raising rates in the summer of 2019, ahead of its stated target of September 2019. In October 2018, the Governing Council of the ECB left all rates unchanged, including the Base deposit rate at -0.4% and stated that rates would remain unchanged until at least the end of next summer.

“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.” However, inflation in the Euro Area reached 2.2% in October 2018, up 0.1% from a month earlier. The ECB is also hoping to end its quantitative easing programme by the end of 2018, but if inflation is rising and the global economy slows, the bank may be forced to bring it back again, as it has limited choice to further cut interest rates that are already negative or very low.

Other experts suggest that with major issues in the Italian economy and slowing growth in the crucial German economy, economic forecasts at the end of the year may be lowered. It has been reported that advisors to the German government have lowered their economic prediction by almost a third from 2.3% to 1.6%. The change was due to a weaker global economic environment, the US/China trade war and the risk of a disorderly Brexit.

EU rejects Italy’s budget

In an unprecedented move, Italy has been asked to send a revised 2019 budget plan after the European Union executive rejected its first submission. Italy’s populist coalition government has until Tuesday 13 November to submit a new budget. However, Rome insists it needs to run a budget deficit of 2.4% of domestic product for each of the next three years, which is against EU finance rules, which are in place to protect the Eurozone. Italy’s ruling 5-Star Movement called it “a budget for change”.

The money would be used to lower taxes to 15% for one million, create jobs, aid retirement and peg VAT, says Deputy Prime Minister Matteo Salvini. However, Pierre Moscovici, the European Commissioner for Economic and Financial Affairs, Taxation and Customs, says if no new budget is forthcoming then sanctions could be imposed on Italy. Among options is a fine of up to 0.2% of GDP, the suspension of billions of Euros in EU funds and closer fiscal monitoring. He says, “I want a dialogue, but sanctions can be finally applied if we cannot reach an agreement.” The decision is now with Italy.

“Member states must fully respect national democratic choices, but they should not run counter to our [rules].”  He adds, “We’re not in a negotiation. We’re not in a discussion. The rules are the rules.” At 131.8% of GDP in 2017, Italy’s debt is the second highest in the European Union behind Greece. But it also has the fourth largest economy, so if Italy did get into trouble, the European Union would find it difficult to come to the rescue. However, the two sides are continuing talks in the hope an acceptable deal can be made.

Brexit is 95% complete

With just four months until Britain is set to leave the European Union, it looks like Brexit may at long last be reaching the end game. This comes, in part, thanks to European leaders who seem more willing to reach a deal with the UK over the tricky issue of the Irish border and the customs union. This would see both sides benefit from avoiding the uncertainty of a no-deal Brexit.

For instance, Bank of England Governor, Mark Carney, has warned that UK interest rates could rise in the event of a no-deal Brexit. British Prime Minister, Theresa May, survived the perils of the Tory conference and whispers of leadership challenges, and is reportedly confident of soon reaching a Brexit deal. However, she says this will “not be done at any cost” to the UK. The withdrawal deal is reported to be 95% complete, but is currently stuck over the problem of guaranteeing no new hard border in Ireland. Talks are proceeding in earnest to find an acceptable solution. The UK Budget in late October, announcing the end to austerity, brought a boost in spending and a change in growth forecasts, bringing the Pound down to 1.12 against the Euro, a smidgen away from its low point. UK economic growth in 2018 was forecast to be 0.2% lower than expected in 2018 at 1.3%, due to impact of bad Spring weather. But the 2019 forecast was raised 0.3% to 1.6% with 2020 and 2021 growth estimated at 1.4%, 2022 at 1.5% and 2023 at 1.6%, Chancellor Philip Hammond announced.

Guidance for Euro Buyers

GBPEUR has been trading in the current range 1.10-1.1550 for the last year. The currency pair is trading at the higher end of that range at the moment. The momentum indicators are approaching overbought levels, so it would be prudent for any near term buyers of the Euro to reduce their exposure close to current levels. Only a sustained break of 1.1550 would suggest a quick move towards 1.2000. Another failure of the current high would see us fall back into the old trading range and we could head back towards 1.1200.

Guidance for Euro Sellers

Here we go again, testing the higher levels of the trading range for the last year. For now, it is worth waiting and leaving protection above 1.1550/80 which has been the high, in case we fail again and head towards lower levels. One to keep a close eye on…

Article supplied by Halo Financial, November 2018.

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