What effect is Brexit having on the euro?

Markets react to uncertainty by becoming volatile, and this has been playing out on the forex markets in the two years since the Brexit referendum vote returned a win for the “leave” option. The pound and the euro have been on something of a rollercoaster ride, and while this might cause traditional investors to look elsewhere, CFD traders are interested in the fast-moving environment.

So much is still undecided in the turbulent Brexit endgame. Although UK Prime Minster Theresa May has signed a deal with the other 27 European Union (EU) heads of state, the forex markets are reacting on a daily basis.

The euro is the official currency of the Eurozone, which is a 19-nation grouping within the larger 28-member EU. Of course, that number looks almost certain to drop to 27 once the UK leaves next March, yet even at this late date, there is a great deal of uncertainty about the situation.

Euro background

The euro became as a currency in 1999 in order to create a single common currency and replace the multitude of national variations. This meant that the  European Central Bank (ECB) became responsible for the new currency. The monetary policy that the ECB produces determines a raft of circumstances, including inflation, interest rates, economic growth and job creation across the Eurozone and the wider EU.

ECB President Mario Draghi announced in July 2012 that safeguarding the euro was an unofficial objective of the central bank. He said that policy officials would “do whatever it takes” to prevent failure.

With a consumer base of over 500 million people, the EU members comprise one of the biggest economies in the world, and the euro is the second-most traded currency on global markets.

Euro influencers

With so much trading activity on the forex markets involving the euro, political risk in the Eurozone is a hot topic of interest for traders. Although the UK did not join the Eurozone and kept its own separate currency, the pound, its split from the EU next year is possibly the largest political upheaval to hit the bloc.

The political machinations of member states and the way that they interact with the governing bodies and the ECB heavily influences the euro price trend. The emergence of Eurosceptic nationalist movements in Italy, France and newer eastern European member states has been a factor in the recent depreciation trend of the euro.

Monetary policies

The ECB’s monetary policies are also obvious influencers of the euro price trend. The tasks of the bank include maintaining price stability and keeping inflation, which is set at close to 2%, on target. The ECB has various methods available for use, including traditional policies such as interest rate hikes and cuts as well as non-standard instruments such as Quantitative Easing (QE).

The markets also react to press conferences held by the ECB. Rhetoric from the bank’s officials can have a significant knock-on effect on the euro. The market-driven speculation that derives from these briefings will often lead to euro price fluctuations.

Euro trading 

As with any other currency, there are advantages and disadvantages to forex CFD trading with the euro. The volume of transactions that the currency is involved in adds to the fast-moving and volatile nature of trading, and this can be attractive to those dealing with CFDs, as it makes the euro highly liquid.

To give an idea of the level of trades involved, the euro was responsible for more than 31% of the market share of overall forex turnover in 2016. In addition, it offers a wide range of high-quality economic data that is readily available. This is particularly useful for anyone using technical analysis as part of their trading toolkit.

Small margins

Although the movement of the pound has mainly been in the headlines as the Brexit saga rumbles on, the euro’s value is similarly hard to predict over the short term. A small improvement or decline in a rate of exchange can have longer-term implications as traders pile on pressure as and when the latest news breaks.

With the date of 11th December now set for the debate of Prime Minister May’s deal in Parliament, the next two weeks are likely to be very volatile regarding forex markets. Recently, US President Donald Trump entered the debate when he questioned the UK’s ability to make a new trade agreement with the US under the conditions likely to occur through May’s current deal. This sets the tone for an even wider fallout on the global forex markets.

Possible results 

So many outcomes are still possible, ranging from a change of Prime Minster either through a Conservative coup or a Labour election victory to a second referendum that may overturn the first. To say that the situation is unpredictable is to simply state the obvious.

There might well be a calmer period ahead if May gets her deal through the UK policymakers debate, but if not, then the recent euro rollercoaster may go on and have even more twists and turns.