2020 saw the pound worth as much as €1.20 and as little as €1.06. Usual economic indicators were thrown out of the window as the pandemic led to a global slowdown. And then there was Brexit. So, where next for GBP/EUR?
If you are planning to buy an overseas property in the new year or need to make regular payments in foreign currency, lock in a forward contract now.
What happened in 2020?
Despite a few bumps along the way, the ECB’s response to the pandemic has been swift. The collaborative policies issued by both the ECB and the European Commission have also shown that the union is strong. European Commission President, Ursula von der Leyen, rebuked member states for “looking out for themselves” when the virus initially hit. The likes of Germany and France placed export bans on medical kit that was vitally needed in Italy.
Member states also disagreed over ‘corona-bonds’, which would secure fresh funding to fight the economic consequences of the Europe-wide lockdown. However, after months of talks, the signing of the Next Generation EU Fund in July was a turning point and kick-started a winning streak for the euro.
The fund ensured that EU countries have financial support during the coronavirus pandemic but also signalled that the union is strong. This, along with an economic rebound in Europe after the first lockdown, prompted the euro to strengthen significantly.
However, this strength has since been met with the challenges of increasing infection rates and a struggling European economy. It has also evoked comments from ECB officials about the danger of a strong euro. The ECB’s chief economist, Philip Lane, stressed that the strength of the euro “dampens the inflation outlook”.
The ECB has said that it doesn’t want EUR/USD to strengthen above the 1.20 mark. This is because of the negative impact of a strong euro on both the Eurozone’s competitive trade position and its inflation rate. Officials tow a fine line between monitoring the situation whilst stressing that exchange rate is not a policy target.
As well as euro movements, this strength largely depends on how the dollar is faring. As a safe-haven currency, the greenback has strengthened in times of crisis this year and weakened when the outlook has been more optimistic. After a win for Biden in the US election and positive vaccine news, the dollar has weakened in recent weeks, allowing the euro to strengthen. This pattern could continue into 2021 and the ECB may struggle to keep the euro’s strength in check.
Whilst the euro has strengthened against safe-haven currencies, such as the dollar, the EUR/GBP pairing has been volatile. The pound has been sensitive to market sentiment and political headlines throughout 2020. It has reacted to the twists and turns of Brexit, the pandemic, and the global economic outlook as a whole.
These factors could continue to drive this pair into 2021. Frictions between the EU and UK over the details of Brexit could continue with much political noise, which could have a significant effect on this pairing.
Your next steps – are you ready for 2021?
Ensure that the events of 2021 don’t affect the value of your budget. If you leave your money unprotected, your 2021 property purchase or regular payments overseas could more costly than you expected.
Why not talk to our trading team about putting a forward contract in place? They will consider your requirements and suggest the best solution for you.