Will the pound continue to fall?

Since the British voted in favor of leaving the European Union, the pound has witnessed severe declines against most major global currencies, especially the euro, and the attention of financial markets is directed to the decisions that the European Central Bank and the Bank of England will take, in their meetings in the coming weeks, which will determine a large percentage. The movement of the euro pair against the British pound.


Sterling fell more than 21% against the euro, according to data ufx platform for currency tradingSince the Brexit was confirmed in June of last year, when it reached the level of 0.93, the question that many investors are now asking is how long the pound will continue to decline and whether we will witness a historical parity level between the pound and the single currency.


Many analysts expect further declines in the value of the pound sterling in view of the macro factors of the British economy, which suffers from high levels of inflation with a decline in the growth rate. In contrast to the eurozone economy, which is witnessing a recovery that was not the strongest in years, which prompted the European Central Bank to announce the imminence of easing the size of the quantitative easing program, which means greater support for the euro.


In the recent rally of the EURGBP, which lasted for four consecutive weeks, the pair reached the level of 93 pence (each Forex companies Availability of spot trading on this pair), which is the highest level for the pair in eight years. The pair has risen more than 10% in a period of just over three months and is 7% away from breaking even.

This parity level, which the pair came close to achieving in December of 2008 after the euro rose against the British pound by more than 45% in less than a year, due to the British economy being affected by the mortgage crisis in the USA, but the pair fell at the level of 98 pence.


The paradox for the Euro and the British Pound is that their value in the near to medium term is very much related to the policy of the European Central Bank and the English in the coming weeks, with the Brexit issue remaining the main problem in the long term.


The problem is that the two central banks are dealing with two contradictory problems. The euro area suffers from low inflation rates and the rise of the euro deepens this problem. As for Britain, it suffers from high inflation above the target level by the Central Bank of England and the depreciation of the pound sterling exacerbates this situation.


Direct intervention of the two central banks in the markets in order to support the currency in a certain direction remains very unlikely by the consensus of analysts and observers, except for the verbal interventions usually used by monetary policy makers in order to gain some time to find durable solutions.


The reason for this complexity in the relationship between the prices of the pound sterling and the euro is the presence of very strong economic ties between Britain and the eurozone. More than half of Britain’s exports go to the eurozone, while it imports 13.4% from the exports of the 19 countries forming the single currency, and thus it is the second trading partner after the United States. United States of America.


The euro represents about 50% the weight of the trade-weighted exchange rate index, while the pound sterling represents 15 of the effective exchange rate index for the euro, and central banks depend on this index in drawing their future expectations of inflation and growth rates.

The performance of the euro in 2017 was the strongest among most of the major global currencies, and the rise of the euro, especially against the pound and the dollar, reflected the significant improvement in the eurozone economy, and also because of the uncertainty surrounding the Federal Reserve’s approach to the number of interest rate hikes, in addition to negative expectations. Britain's economy because of Brexit.


The Euro's gains have a lot of European monetary policy makers worried, and this is very likely to be discussed during the ECB meetings in the coming weeks but most analysts don't expect the central bank to take any action other than verbally.


The main strength of the Euro against its currencies lies in the strong recovery of macroeconomic indicators at the fastest pace in six years, so the possibility of witnessing further gains in the EURGBP is very likely.


Mohamed Abdel Khaleq

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