A recent article I wrote, “The Pound and the EUR/USD”, was well received. In it, I discussed the implications of this trend and predicted that we may see a further depreciation of the GBP against the EUR over the next few months. If you missed it, check out the article below.
We’ve had some very strong trade and investment trends in the past two months but one of those has been a weak exchange rate against the US dollar. This has resulted in a lot of European companies to invest in the UK, both domestic and international. This has meant that we have had an influx of investment funds into the UK and the pound has weakened against the dollar.
However, there has also been a weakening of the Sterling against the EUR. I’m not sure why this has occurred at this time but I’m afraid it is very likely that we will see further depreciation of the pound against the EUR over the coming months. The reason I think that this trend could take place is because the UK government’s plan to devalue its currency by reducing the deficit by over four billion pounds is now coming to fruition. If they succeed in doing this then this will have a direct impact on the price of the Euro as well as its value against the pound.
In this article I’ve outlined some possible scenarios whereby the Euro may weaken against the pound and the exchange rate between the British Pound (GBP) and the Euro may depreciate. Of course the Euro is very unlikely to fall in price against the GBP, especially if it is seen as being necessary by many in the City. However if this is seen as desirable by other traders then we could see a rapid depreciation of the pound against the Euro, making the EUR one of the strongest currencies.
It’s important to understand how the Sterling is valued against the Euro at present before I discuss whether the Euro could weaken against the British Pound (GBP) in the future. The British pound has always appreciated against the Euro in recent years. This makes it easier for the British government to maintain its competitiveness and its ability to attract investment funds to its shores.
Latest: GBP/USD Sell-EUR Sell-Off a Dollar Driven Event, GBP/NZD} If the Euro becomes more expensive against the British pound, particularly against the EUR, then the Pound could become more valuable against the EUR than against the GBP, which would make it more difficult for the government to maintain its competitiveness. This would mean that the British Pound (GBP) would appreciate against the Dollar. Of course, I don’t think the governments will want to see this happening because it would be a major blow to UK finance.
It’s likely that this scenario will occur at some point in the next couple of months, as the government has announced a number of measures to counter the impact of the depreciation of the Euro against the GBP, which will reduce the deficit and improve the stability of the economy. But if the British Pound continues to strengthen against the Dollar and remain on a path to depreciation, then I expect the Euro may weaken against the pound and consequently reduce the value of the British Pound (GBP).
In addition, if the Euro continues to depreciate against the Pound, then the British Government may not be able to continue to subsidise businesses in the UK in the same way it has done in the past. It is therefore important for the UK to plan ahead with regard to what it will do if this happens, in order to avoid any unexpected knock on effects.
It’s worth noting that there is a potential risk that the Euro may weaken against the Pound further, but this is not something that will happen overnight and will occur over the next several weeks, rather than over the next few months. As a result, the British Government is likely to keep on providing support for the UK economy and support to its banking system through a range of measures.
Finally, it’s important to note that the Euro may weaken against the pound and therefore the UK government might wish to continue to subsidise businesses in the UK in the same way that it has done in the past, despite the potential effect on the British Pound (GBP) as the price of exports goes down. Indeed, it’s worth noting that this type of action can be seen across many of the economies around the world, such as Japan and South Korea, where the governments provide support for their national economies.