Why is the GBP superior to the Euro
Pound-euro forecast 2021: where will Brexit talks and low interest rates drive the forex giants?
The exchange rate between the British pound (GBP) and the euro (EUR) will continue to be determined by the development of the Brexit negotiations. With the deadlines ahead of the talks, what is the outlook for the currency pair for the rest of the year and 2021?
Since the UK vote to leave the European Union, the pound has fallen towards parity with the euro. The impact of the Covid-19 pandemic on the UK and European economies has added further volatility with the prospect of negative interest rates, with the forex pair hovering around 9% in either direction this year.
This article provides an overview of the factors influencing developments in the GBP / EUR trend, evaluates the latest performance of the currency pair and looks at analyst forecasts to help you make informed trading decisions.
The basics: what investors need to know about GBP / EUR
The GBP / EUR pair indicates how many euros (the quote currency) it takes to buy one British pound (the base currency). It is a popular cross currency pair that does not include US dollars. GBP / EUR is often chosen by investors for portfolio diversification.
While GBP / EUR isn't traded as frequently as other pairs like EUR / USD, USD / JPY, GBP / USD, USD / CAD, and AUD / USD, it remains one of the most popular instruments in the forex market.
Factors that affect the value of the GBP / EUR
The mood is an important driver for the pound-euro exchange rate development. The uncertainty surrounding the negotiations between the EU and the UK over Brexit has pushed the value of the British pound down.
Meanwhile, concerns over the impact of Covid-19 on the UK economy, which has been hit harder than the euro zone, has led traders to go short on the pound against the euro.
Given the pandemic, which is driving unprecedented economic stimulus, traders looking to make a pound-euro forecast should consider the impact of the decisions made by the European Central Bank (ECB) and the Bank of England on monetary stimulus measures, as lower interest rates invest less make it attractive.
Macroeconomic factors such as GDP, services and manufacturing activity, unemployment and consumer price indices provide indicators that are also driving currency markets and influencing the GBP / EUR forecast for 2021.
GBP / EUR Price Analysis: Political and Economic Challenges for the Pound Sterling
The pound sterling rose 5% against the euro in 2019 due to weaker economic growth in the euro zone and following the UK general election as traders looked for signs of security in the Brexit process. In December, the GBP / EUR pair rose to the 1.20 level for the first time since the referendum in June 2016.
However, the forex market has become more volatile in 2020, with the GBP / EUR rate hovering around 1.20 in February, just before falling to 1.06 in March when the UK announced a lockdown to the spread of Covid -19 to slow down. The rate rose to 1.14 in April but fell to 1.08 in September as a surge in coronavirus cases hit the pound sterling and the status of the Brexit negotiations increased the possibility of the UK leaving without an agreement at the end of the year.
UK GDP rose 2.1% in August, well below expectations of 4.6%. Industrial sector data was weaker than expected, falling 6.4%.
Economic data continues to raise questions about the prospect for the underlying recovery in the UK, despite reports that UK Chancellor Rishi Sunak may introduce a local leave of absence regime, according to forex analysts at Sucden.
The shape of the economic recovery will affect the GBP / EUR forecast for 2021.
Pound-euro forecast 2021: Brexit deadlines are the key to market development
Analysts are looking to the key data in the coming weeks that will determine the direction of the market and help formulate their GBP / EUR forecast.
The UK has set a deadline of October 15 to reach an agreement with the EU, but this could be extended. The Bank of England's Monetary Policy Committee (MPC) will make its next decision on interest rates on November 5th. The central bank has begun studying the impact of negative interest rates on UK banks, which will drive the currency down.
Citibank (C) analysts stated in their latest forex report: "Brexit is re-emerging as a major driver for the British pound, with the controversial new single market bill for Great Britain raising concerns about the no-deal Brexit As a result, GBP has started to depreciate. "
Earlier, John Hardy, head of FX strategy at Danish investment bank Saxo, said: "Even if talks fail, it doesn't necessarily mean that no deal is possible before December 31st.
The market continues to shape the sterling price as if a breakout is quite likely this week, but the situation will almost inevitably create significant volatility in both directions, depending on results around the deadline ... the confidence of some for sterling positives Results are increasing, but that may be justified.
However, traders should therefore also acknowledge that the impact of negative results will be all the greater if, for example, we see a real stalemate and breakdown of talks, if only temporarily, after the mid-month deadline expires with no agreement in principle . "
In its pound-euro forecast, Saxo expects the pound sterling to stay below 1.10 this week without an agreement.
Analysts at the Canadian Bank CIBC also expect the pound sterling to remain under pressure: "The key variables that go into the forecasts [are] the development of the Covid cases and the transition to new trade agreements after Brexit. The long-term Brexit assumption of the Bank envisaged an "orderly transition to a comprehensive free trade agreement" for the UK, but that looks increasingly unlikely. "
The analysts said: "While we are still expecting a deal this late, it is unlikely to be far from comprehensive ... As the timeframe tightening, we expect the pound sterling to continue to be dominated by Brexit headlines. that the reaction to a deal or no deal scenario is unlikely to be symmetrical ... Beyond Brexit, the V-shaped recovery assumed by the BoE seems to be challenged by tightened lockdown restrictions, although the UK government continues to do so while looking to avoid a repeat of the lockdown in March, the slowdown in services will continue to weigh on the recovery. "
TD Strategies analysts said, "Brexit remains a major risk, but we are now seeing it more tactically than strategically. The range of results has narrowed and the deal on the table marks a very tough Brexit. At current levels, most of the Brexit damage may have already been calculated, but the situation remains critical and uncertainty is acute. Instead, the pandemic aftermath is now more of a challenge. The UK economy has been particularly hard hit. The risks of renewed lockdowns likely to dampen confidence and growth. "
According to Commerzbank's pound-euro forecast, the GBP will strengthen slightly against the euro in 2021, rising from 1.10 at the end of the first quarter to 1.12 at the end of the year.
A popular online forecasting service Wallet Investor predicts that the pound sterling will stand at 1.10 against the euro in late 2020 and will continue to hover around 1.10-1.12 over the course of 2021. This is what the pound-euro exchange rate forecast for the next year looks like:
Follow the latest forex market news and stay up to date on the pound-euro development in 2021 on Capital.com
How to Trade Forex Pairs in 2021
As an alternative to investing in forex pairs, given the uncertain long-term outlook, you can try to take advantage of market volatility by trading Contracts for Differences (CFDs).
Learn more about trading CFDs in our free online courses and learn how to trade CFDs with our comprehensive guide.
Have you already decided which currency pairs to invest in? Then open a trading account at Capital.com now.
Trade Euro / British Pound CFDs
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