Pound and Euro 2018 forecasts - it’s not all doom and gloom

5th January 2018

Thomas Huskinson
Thomas is WhitesPay’s Lead FX Trader and joined the business in 2015. In addition to his trading desk skill-set, Thomas is our chief economic content creator and responsible for our market updates.

Brexit was on everyone’s lips throughout 2017 and will also dominate much of 2018-2019. We've begun 2018 in a similar vein to where we left 2017 - GBP/EUR sitting around 1.1250. That being said, the currency pair hasn’t stood still. Although arguably, the euro has remained very consistent and there were very few losses from the euro in 2017. Much of the pair's recent movements can be pointed towards the pound’s performance.

Pound strength towards end of 2017 despite scepticism

Remainers were hoping Article 50 wouldn’t materialise and the wheels would fall off the Brexit bus. But on March 29th 2017, Article 50 was triggered helping the pound to recover some much needed gains. This came as a surprise to most but with direction and clarity, the currency began to recover after a traitorous 12 months. Uncertainty is amongst the most damaging attributes for a currency, which echoes the pound losses experienced following the 2016 referendum.

The biggest development for GBP/EUR of 2017 was moving trade talks forward. Whilst negotiations are only just beginning, the road ahead is now clear and talks can evolve.

Euro concerns to heighten in 2018

Our concerns for the GBP/EUR lies with the euro. Throughout 2017, whilst the euro remained consistent and losses were minimal, we didn’t see any major gains either. Inflation has remained sluggish, Germany (Europe's largest economy) hasn’t yet confirmed its government and employment is set to fall. Despite the pound having its own issues amid ongoing Brexit negotiations, the economy is stable and employment is at highs not seen in two decades. The Bank of England is also beginning to bring policy back to a normal state, although Brexit could set to unhinge these points. For now though, they remain strong and this cannot be said for the rest of Europe.

A testing but pivotal year for the pound

2018 will be amongst the most important years for the pound and Brexit will undoubtedly play a significant role in how this pans out. September/October 2017 reminded us that the currency is still firmly underpinned by the economy for the following reasons:

  • In September/October 2017 employment rose to its highest in 40 years
  • The pound rose 4% against the euro
  • We have since seen the Bank of England hike rates for the first time post-recession
  • 2018 has begun with employment still at a 20 year high
  • Inflation still over target and Manufacturing Production remains strong

Outcomes are difficult to predict for the year ahead but we believe progress made towards the latter end of 2017 is a strong indicator for future months. GBP will feel this most once there are outlined details surrounding trade and passporting, even if we don’t achieve the same deal we currently hold. Again, there will be certainty in what Brexit could look like and therefore the pound will benefit. Trade talks will take place within the next few months, which will be a good opportunity for the pound to make some gains early on. We of course do not expect negotiations to be easy based on what we have seen so far but the outlook for the pound looks promising.

GBP/EUR rate predictions

Q1: 1.13 Q2: 1.15 Q3: 1.15 Q4: 1.14

Q1: 1.14 Q2: 1.16 Q3: 1.16 Q4: 1.16

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