After an electric start to the year, GBP / EUR is currently trading at just under 1.40. We started 2015 at 1.28 and we’ve seen massive changes since. If the markets were an actual rollercoaster, you’d have needed to hang on through a series of corkscrews, including:

  • the monumental shift when the Swiss National Bank removed the franc’s peg to the euro
  • the whopping quantitative easing (QE) package from the European Central Bank (ECB)
  • the massive rally by the US dollar on expectations of a US rate rise

Throw in all the uncertainty in the lead up to the UK election, and it’s been a pretty wild ride. To give some context to this volatility, in the last month alone GBP / EUR dipped from 1.40 down to 1.34, then back up to 1.40 again following the con_ rmation of a Conservative majority in the UK election. In a 12-month period GBP / EUR has gained more than 16%.

Where to from here?
For the timber industry, this volatility in pound and euro values is leading to a major shift in trading patterns and pricing uncertainty. The pound’s strength over the last 12 months has favoured a move towards products from European exporters as the gap has closed on domestic producers. However, the sharp upward move in Sterling has contributed to an oversupply problem as prices continue to fall.

This has put pressure on domestic producers to lower their prices – but this just exacerbates the problem. Although the underlying UK market is robust, and will benefit from the UK election outcome, the erratic currency markets are still a hurdle to be overcome.

What lies ahead in relation to GBP / EUR is therefore extremely important to the timber industry. The good news is that many of the uncertainties have now either been removed or accounted for by the markets.

Greece’s Epic – An Unfolding Tragedy
The ongoing impact of QE in Europe is something the markets are now allowing for, and the UK election result has had a calming effect on the pound in the short term. But notable obstacles ahead include Greek bailout negotiations, decisions on when interest rates will rise and the possibility of a UK referendum on its EU membership.

Greece’s precarious position is a serious concern, at least in the short term. If Greece does manage to unlock the €7.2bn in aid it needs, it will still require help after June (when the current bailout plan ends). Failure to reach agreement could see Greece leaving the EU, and the impact on the euro would be very negative. To take one possible outcome as an example, a "Grexit "would lead to a very sharp rise in EUR / GBP.

A final bailout decision could be delayed but it can’t be kicked down the road indefinitely – Europe is going to run out of road. The bookies’ odds for a Grexit in 2015 have shortened considerably, to 3/1 (25%) or "implied probability." However, if a Grexit can be avoided the euro will find the markets far less skittish. Eurozone growth recently rose at its fastest pace since 2011; there are signs that momentum is steadily building.

If the Greek epic can be cheerfully wrapped up, this would certainly bolster the euro in the short-term – possibly pushing GBP / EUR back towards 1.35.

That’s not all…
In addition, all eyes are currently on the US Federal Reserve’s Federal Open Market Committee (FOMC) regarding interest rates. The US dollar has rallied dramatically since mid-2014 as the market positions itself for an expected rate rise by the Fed later this year. Should the Fed meet this expectation, the divergence between US rates and the ECB’s rates will lead to pressure on EUR / USD – some analysts point to parity (and below).

That the Bank of England could soon follow in raising rates would help GBP / EUR push higher, especially since the ECB will still be entrenched in monetary easing. A move towards 1.50 in GBP / EUR would reflect a EUR / USD move to parity. We see the divergence of the central banks’ policies as being the main force that will drive the euro lower still in late 2015 and early 2016.

A possible UK referendum on Europe in 2016 or 2017 could also start to weigh on the pound.