One of the most traded currency pairs on the FX dashboard, the EURGBP reflects the differences between the U.K. and the Euro area economies. Also, it shows the differences between the monetary policies run by the two central banks – the Bank of England and the European Central Bank.
Since the 2016 Brexit referendum, the EURGBP has reflected something else too. That is, what Brexit brought for the two currencies, as seen through the eyes of the FX market.
Brexit Meant a Lower GBP
A currency may depreciate for various reasons. Sometimes the central bank intends to do so in the hope that the economy will perform better, and the local products will become more competitive on the international markets. Some other times, the currency declines based on perceived weakness in the market. If the market participants believe that a currency is overvalued against another one, the exchange rate is the first one to move, way before the economy reveals the weakness.
The chart above speaks of itself. Brexit brought a lower GBP not only against the Euro but in general. Effectively, a currency depreciation at such a fast pace reflects dissipating wealth. The 2021 pound does not buy anymore what it bought in 2016. That may be a good thing for the economy, providing the currency does not decline further, but it is a negative for households.
The 0.90 level proved to be pivotal for the EURGBP cross. It is not the first time when the market consolidates at the level; only this time, the consolidation takes longer than in the past.
For bulls, the longer the pair stays close to the 0.90, the bigger the chances that it will try for parity. One may argue that the market forms a bullish flag on the monthly chart.
On the other hand, bears may argue that the market is at risk of forming a double top. The first attempt above the 0.90 in 2009 was followed by the second attempt as Brexit ended.
Perhaps the most important thing on the chart above is the impact of fundamental factors on an exchange rate. Investors usually use fundamental analysis to position for long term trades. This time, betting in the GBP’s decline against the EUR in the aftermath of Brexit paid off handsomely. All one had to do was to patiently wait for the process to end.