If you enjoy visiting parts of Europe on holidays or for business, then it’s likely you have noticed getting fewer Euros for your British Pound. Since the announcement - and subsequent result of - the Brexit vote, the value of the pound against the euro has been falling. It’s safe to say that the value of the pound on the foreign exchange markets has seen better days.
The exchange rate is affected by many things, not least by political stability and performance, terms of trade with other countries, and speculation by those who buy and sell currency on the stock market. By keeping a close eye on how national and political events affect the exchange rates, you can cherry pick the best time to exchange your currency, thus giving you more for your money. Of course, this does take practice and is never guaranteed – the stock markets cannot be fully predicted for good reason – but it can help to save you money if you plan on travelling to Europe in the future.
To help you see what affects the markets, here’s a rundown of the news for the last 12 months which has influenced GBP/EUR currency value:
In the early hours of 7th October 2016, whilst trading was closed in London and New York, the pound suffered a ‘flash crash’ – dropping down 6% - during Asian trading. Unusually, it’s not clear why this happened. It may have been down to news that the French President, Francois Hollande, had said he wanted tough Brexit negotiations. It may also have been down to human error, and compounded by the fact that many other international traders were asleep at the time.
On the 8th, 9th, and 10th of November, the value of the pound rose quite steeply. This was a pleasant surprise, financially speaking, but it didn’t happen as a result of anything happening in the UK. Just as Brexit came as a surprise to many, the election of Donald Trump to the US Presidency triggered a wide sell-off of the US Dollar, decreasing its value and therefore boosting the value of the pound. The ‘Trump Slump’ teaches us that keeping an eye on both national and international news can also give you clues.
The value of the pound dropped again on the 5th December after a general upward trend since the election of Donald Trump. This was due to the value of the Euro improving in anticipation of an announcement by the European Central Bank. They were expected to announce a scale-back of their quantitative-easing programme. When they announced instead that they would be extending the programme, the value of the Euro once again dropped, and the pound all but recovered its losses.
In the days leading up to Prime Minister Theresa May’s Brexit speech on 17th January 2017, the value of the pound fell to a two-month low against the euro. This was down to speculation in the markets that she would be announcing a ‘hard Brexit’ – one which would mean uncertainties on future trading and stability of the pound. The speech did not go this far, and May’s plan included enough to help the value of the pound stabilise again by the end of the month.
The value of the pound rose at the beginning of February but then dropped again mid-month due to the release of retail spending figures for the last quarter of 2016. The results showed an unexpected downturn in spending, which was likely a result of stagnating wages. This weakens the UK economy as a whole, and therefore the value of the pound drops accordingly.
From the end of February to the middle of March, the value of the pound fell rather steeply, with little to no significant rises at all in this time. This was due to the release of reports on UK manufacturing, industrial and construction outputs, which have unfortunately been shrinking since the Brexit vote. This causes the pound to lose value, due to uncertainty surrounding investing in UK industries. There are many unknowns in the UK’s post-Brexit future, and the stock markets tend to fluctuate wildly in times of relative instability.
On the 18th April 2017, Theresa May called a snap election, despite ruling it out when she took power of the Conservative Party after the Brexit vote. Due to the political instability and the ‘what now?’ reaction to Brexit, this election was seen by traders as a good thing. By calling an election for June 2017, the next election would then not be due until 2022, ensuring a more consistent platform for Brexit negotiations. This helped to boost the value of the pound in April.
At the time of the election announcement, the result seemed very clear – the Conservatives would easily win their majority and Theresa May could finally begin Brexit negotiations as a fully elected Prime Minister with confidence. Over the month of May, during which all political parties had begun their campaigns, it became clear that this result was not as set in stone as everybody thought. A poll at the end of May showed that there may be a hung parliament, which of course negatively affected the pound’s value.
The downward trend of the pound vs the euro was not helped by the election result, which failed to give the majority to any party. Some losses were recovered after Theresa May announced that she would form a government with help from the Democratic Unionist Party of Northern Ireland, however the trend continued downwards due to this new political uncertainty.
The value of the pound fluctuated during July, with an improvement in the middle of the month down to better than expected retail sales figures for June. However, the political turmoil and news of a difficult start to Brexit negotiations meant that this improvement was just temporary. The euro strengthened during this time also, putting more pressure on the value of the pound.
On the 26th August 2017, the pound hit its lowest point of the past 12 months after a steady downturn throughout the summer. This is likely to have been due to a reduced number of foreign investors as a direct result of Brexit uncertainty. When confidence in the future of an investment is shaken due to political instability, traders tend to opt for other currencies. This heavily affected those wanting to exchange their pounds for euros during the summer holidays.
Although all forecasts during August were doom and gloom, the pound saw a surprising improvement over September, regaining all the losses it suffered over July and August. This is due to speculation over the Bank of England preparing to raise interest rates, and the fact that the euro slumped after the German election. Although Angela Merkel retains her position as Chancellor in Germany, the gains made by the far right ‘Alternative for Germany’ party caused political uncertainty, thus devaluing the euro.
October 2017 and beyond
The value of the pound is still sitting in an improved position compared to the summer months, and has improved in recent days due to a better-than-expected growth in the UK services sector. Forecasts for the future are understandably mixed, and the future of the pound vs euro depends highly on the political performance of the UK, countries within the EU and the US in the coming months. When buying foreign currency, it’s always important to choose a deal at the right time and keeping an eye on current events can help you to know when’s best to make a move.