Sterling Euro Exchange Rate Spirals To 42-Month High As Anti-Austerity Parties Make Gains In Greek Elections And France Elects Pro-Growth President

Published: Tuesday, 8 May 2012 09:00 BST - Written by James Fuller

STORY LINK Sterling Euro Exchange Rate Spirals To 42-Month High As Anti-Austerity Parties Make Gains In Greek Elections And France Elects Pro-Growth President

Political upheaval in mainland Europe has had a dramatic effect on the currency markets since they re-opened on Sunday night. The French people voted in favour of Francois Hollande to be their new head of state on Sunday, leaving the country’s erstwhile President Nicolas Sarkozy adrift in the political wilderness. The Socialist candidate Hollande was elected on a firmly ‘pro-growth’ ticket and early indications are that he will struggle to reconcile this with German leader Angela Merkel’s ‘sound money’ solution to the eurozone’s debt crisis, which has up to this point been so positively received by the markets.

Concerns about Euroland’s future fiscal prospects were exacerbated by a tame showing for the two major political parties, Pasok and New Democracy, in Greece’s general election, also held over the weekend. Between them, the two parties earned less than one in three votes, leaving minor ‘anti-austerity’ parties to make massive gains. A protracted period of political horse-trading is now expected in Greece, as Antonis Samaras, the leader of the New Democracy party, attempts to forge a coalition in order to move the debt-addled country forward. The longer this takes, the greater the pressure will be on the euro, as speculation will mount regarding the Hellenic state’s future.

The weekend turmoil in Europe caused a shift out of euro-denominated assets, causing the GBP EUR exchange rate to spiral to 1.2445 soon after trading re-opened on Sunday night. This was the pair’s highest level since November 2008.

Elsewhere, the ‘risk off’ trading environment which Friday afternoon’s weaker than anticipated US Non-Farm Payroll numbers for April triggered has prevailed during the early part of this week’s session. This has taken global stock indices lower, and heaped pressure on the already out-of-favour Aussie and Kiwi Dollars. It appears unlikely that the mood of risk aversion is going recede in a hurry, meaning that the AUD NZD and ZAR could experience further selling pressure as the week progresses.

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