Analysis of GBP and EURO Exchange Rates in the Financial Market

This report provides an analysis of the GBP and EURO exchange rates, delving into the economic factors that influence their values. It examines the impact of interest and inflation rates, current account deficits, and political stability on currency fluctuations. The report also explores the specific dynamics of the EURO, considering factors such as the European Central Bank's policies, Brexit, and the overall economic performance of the Eurozone. It offers a forecast for the GBP/EUR exchange rate, taking into account various market trends and expectations. The report references several sources to support its findings and provides a comprehensive overview of the financial market dynamics related to these two major currencies.

FINANCIAL MARKET

GBP & EURO
The exchange rate can be defined as the value of one currency in differentiation to another.
However, the volatility present in the market makes it complex and confusing at times. The
economic factors that influence the exchange rate are as follows:
a. Interest and inflation rate
Inflation is a persistent increment in the price of goods and services over a period of time. It
indicates the amount that is charged by the banks when it comes to the borrowing of money.
The duo factors are linked together. People have a habit to borrow and spend when the rate of
interest is low that leads to increment in the cost. Such rates can be defined as direct
indicators of current, as well as the future economic performance of the country and
influences the decision taken by the forex investors and traders everywhere. An increment in
the rate of interest is witnessed by the increment in the currency (Skinner, 2018). It happens
to owe to the fact that the economy is progressing at a rapid scale and central banks are
looking forward to slowing inflation.
b. Deficits in the Current Account
The current account can be defined as the balance of trade that exists between a country, as
well as the trading partners. It enables to project the difference that exists between the value
of goods, as well as services trade with other countries. In this scenario, it is a common
parlance that if the country purchases more than the power it has to sell then a deficit can be
noted in the balance of trade. It impacts the rate of exchange directly because foreign is
demanded more by a country and this leads to the decline in the local currency (Nguyen,
2019). This leads to higher level of supply of the local currency in contrast to the foreign
currency.
c. Economic performance
Political stability is another important factor that influences economic performance. It needs
to be noted that a country that has a stable political environment enables the attraction of
higher level of foreign investments and vice versa. When increment in foreign capital
happens it leads to enhancement in the domestic currency value.
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GBP & EURO
The Euro can be the most vital currency in 2019. Europe was overburdened by the political
scene since the starting of 2017. In the present scenario, the Italian elections are deemed to be
in history and politics remains a significant risk. The European Parliament elections fall due
in May 2019 and hence volatility can be seen in the Euro prices. Going by the overall
scenario, it can be commented that the Central bank of Europe will raise the interest rate in
the summer of 2019 so that the rates remain hiked and that the stimulus is winding down
(Nguyen, 2019). In the span of 6 months, an increment of 25 bps can be observed. A
movement like that is contingent in nature that is unavailable at the moment and calms the
financial market. The growth will bounce in the latter half of 2019 following a weak year in
2018. With the ECB hiking the rate of interest and the Federal reaching top in their cycle of
hiking, it is assumed that in the EUR will put a brave performance in 2019 (Jones, 2019).
Figure 1 GBP/EUR forecast
(Doane, 2019)
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GBP & EURO
It's been reported that ECB will provide more loans on a cheaper basis so that the economic
activity is boosted. Hence, if this situation is looked from a longer perspective then it can be
commented that the economy is performing without the presence of QE. This situation will
dampen the performance of the Euro. Moreover, Brexit will continue to be the key factor
when it comes to GBP/EUR and hence, in the longer time frame the situation looks weak.
The outlook of the Eurozone looks weak and this can be a potent factor in the weakness of
the currency (Cook, 2018).
European economic data is mixed and there are little chances of any change before the
summer. It is believed that the single currency might face immense challenges from the
Italian populist and Brexit. Overall it can be commented that the Brexit can hurt both Euro, as
well as sterling (Doane, 2019). As per the current condition and expectation, it can be stated
that the forecast will move to 108.7 from 103.8. Hence, in the upcoming 3 to 6 months there
can be a down trend and the currency is expected to fall.
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GBP & EURO
References
Cook, J. (2018) What do we think will happen to the euro in 2019?. Available from:
https://www.worldfirst.com/uk/blog/2019-currency-outlooks/what-do-we-think-will-
happen-to-the-euro-in-2019/ [ Accessed 23 April 2019]
Doane, C. (2019) Euro Rate Forecast. Available from:
http://www.eurorateforecast.com/2019/04/08/sterling-euro-forecast-uk-moves-towards-
a-customs-union-with-the-eu/ [ Accessed 23 April 2019]
Jones, H. (2019) Which currencies will be the winners of 2019?. Available from:
https://www.thenational.ae/business/money/which-currencies-will-be-the-winners-of-
2019-1.809778 [ Accessed 23 April 2019]
Nguyen, J. (2019) 3 Common Ways to Forecast Currency Exchange Rates. Available from:
https://www.investopedia.com/articles/forex/11/4-ways-to-forecast-exchange-rates.asp
[Accessed 23 April 2019]
Skinner, J. (2018) EUR/USD to See New Lows in 2019 says Barclays. Available from:
https://www.poundsterlinglive.com/eurusd/10511-euro-to-dollar-rate-to-see-new-lows-
in-2019-says-barclays [Accessed 23 April 2019]
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