The GBP/EUR currency pair has been one of the most active, volatile, and range-bound trading instruments in the world. The British Pound (GBP) surged following the Brexit vote only to reverse course and head into a steep depreciation months later. Meanwhile, the euro (EUR) had a measured response to Brexit but has subsequently struggled with its weakness. With political events having recently gathered pace. This article will examine two key issues that have shaped recent market sentiment for both currencies: geopolitical tensions between Russia and Ukraine and escalating disputes between Germany’s coalition partners on immigration policies.
The latter has led to a breakdown in talks between Chancellor Angela Merkel’s Christian Union (CDU) and the Free Democratic Party (FDP), who are often grouped as the “liberal” or “left-leaning” party in Germany. This essentially leaves German Chancellor Angela Merkel’s coalition government vulnerable, forcing contracts on a re-election vote in the country. With elections scheduled for September, political events are likely to continue dominating both currencies over the coming months.
EUR/GBP Outlook
The EUR/GBP has seen significant gains over the past few sessions as the British Pound hit multi-month lows. In recent days, however, the EUR/GBP has retreated from these levels. The currency pair may be at an intermediate top, with GBP/EUR unable to break a longer-term downtrend line. We can see how the British Pound has struggled to maintain any gains above this downtrend line since late September. GBP/EUR tested the downtrend line three times in October and failed each time. Ultimately, this level drew resistance and turned into support as GBP/EUR began testing it as a cap.
EUR/GBP oscillates above 0.8600 on downbeat UK fundamentals, ECB Minutes eyed By @anilpanchal7 https://t.co/SNql0dKTsG #EURGBP #Politics #Recession #ECB #Crosses
— FXStreet News (@FXStreetNews) July 3, 2022
This standoff over support occurs despite political issues that have been weighing on both currencies for months. In other words, the political factor does not appear to be having its usual impact on the EUR/GBP exchange rate.
GBP/EUR Outlook: Geopolitics Take Center Stage
The British Pound has been one of the worst-performing currencies since late 2014 when the U.K. first voted to leave the European Union. This vote, known as “Brexit,” triggered years of political turmoil and market uncertainty that have dominated British headlines ever since. Political uncertainty aside, Brexit has also exposed some structural weaknesses in the British economy, which largely stems from its high trade deficit with continental Europe. This is due to several structural issues including aging demographics (fewer workers and more retirees than any other G7 country), public debt, and low productivity growth (which has resulted in little wage growth for many workers).
What are the Key Economic Data Points for GBP/EUR Outlook?
The EUR/GBP is highly sensitive to interest rate differentials between the two countries, which is why the GBP has been unable to weaken despite Brexit concerns. Stronger-than-expected inflation and manufacturing data in Germany have helped keep the EUR/GBP from weakening further. Meanwhile, weak inflation and manufacturing data in the U.K. has delayed any possible gains for the British Pound shortly.
What are the Political Events for GBP/EUR Outlook?
The United Kingdom and Germany have been embroiled in political turmoil for over a year as voters and markets wait for political developments after Brexit. The deadline for the conclusion of Brexit negotiations is November 21st, with just over five months left to go. Germany has recently seen its coalition government deals fail as the Free Democrats (FDP) have withdrawn support, citing immigration as a key issue. FDP leader Christian Lindner called immigration a “cause of much inequality and social division” in Germany. The party’s withdrawal from Chancellor Angela Merkel’s coalition has brought uncertainty over whether Merkel will remain in power or if she will be forced to call for another election or attempt to form a new coalition partnership with other parties.
