Eurozone

Earlier this year, the euro’s future was anything but certain. Elections in the Netherlands and France threatened to destabilise the single currency, with the rise of the far-right, ‘Frexit’, and a return to the franc all a real possibility. Small businesses trading with Europe sought to protect their bottom line from a predicted decline in the euro, and exchange rates wobbled. Jake Trask – FX research director at international payments company, OFX – explains the current state of the euro, and offers tips for small British businesses that may be feeling the effects of a strong single currency.

 

In the end, however, far-right candidates were soundly rejected in both elections – and since then, the euro has gone from strength to strength. In fact, it is currently the best performer among developed market currencies, and right now, it looks like 2017 will end up being the year of the euro.

Why is the euro so strong right now?

In May, Emmanuel Macron’s victory in the French election helped to rebuild confidence in the euro and boost its value. Had Marine Le Pen’s National Front won the election and followed through on the promise to reintroduce the franc, the single currency could have gone into a freefall – just like we saw for sterling following the EU referendum. Indeed, we could even have seen the end of the euro.

However, economic data has been improving from Eurozone economies in recent months – particularly France and Germany – leading to speculation that the European Central Bank may cut back its Quantitative Easing programme before the end of the year. As a result, 2017 could very well be the year the currency moves out of crisis mode, leaving the troubles of recent years behind it.

What’s next for the single currency?

As we head into the autumn, the euro is likely to enter a period of consolidation. Even so, part of the reason for the euro’s current strength is the fact that other major currencies are looking less healthy. The disappointment of the dollar – which soared after President Trump’s election, only to drop when his campaign promises failed to materialise – is putting upward pressure on the euro, as is the uncertainty of Brexit that currently surrounds the pound.

The pound and euro could move closer together as Brexit negotiations continue, and uncertainty weighs more heavily on business confidence and the UK economy. Despite above-target inflation, the Bank of England is likely to keep interest rates on hold for the time being.

How could a strong euro affect your business? 

A strong euro is great news for any British business exporting to the Eurozone, as it means sterling-denominated goods are more attractive than domestic equivalents to European buyers. It’s a unique situation to make the most of – and a recent survey by OFX found that more than a third of British SMEs already expect to start or increase exporting in the next year, to take advantage of the weak pound.

It is more challenging for those importing from the continent, but a good currency partner can still help to protect your business from further pressure, and keep costs down and profits high.

If you trade overseas but aren’t sure how a strong euro could affect you moving forwards, speak to an expert who can recommend a currency strategy that’s tailored to your company’s needs.

Protecting your business from currency risk

A forward contract would be a prudent choice for small British businesses trading with Europe. Locking in today’s exchange rate is a good way to protect your company from any future shocks to the exchange rate – and considering the Brexit uncertainty surrounding the pound, they simply can’t be ruled out.

Many of the small businesses we work with have also chosen to open euro-denominated ‘virtual accounts’, allowing them to collect the proceeds of their European sales directly, in euros. Limit orders, meanwhile, have enabled them to take advantage of exchange rates unseen since the financial crisis. A limit order is a specialist tool that allows businesses to nominate an ideal exchange rate. When this is reached by the market, your funds are automatically transferred – a great way to tap into further currency movements without having to watch the markets minute by minute.

The euro may be at a high, but disparities between strong EU economies and poorer member states like Greece and Cyprus are still plain to see. The Greek crisis still has the potential to erupt in the future, so if you’re a fan of today’s exchange rate, it might make sense to lock it in for the months to come. As ever, an expert can help you develop the best currency solution for your business.

Jake Trask is FX research director at OFX, an international payments company.