EUR to GBP Exchange Rate Gains on UK Election Jitters

May 31, 2017 - Written by Frank Davies

STORY LINK EUR to GBP Exchange Rate Gains on UK Election Jitters

After a brief drop earlier in the week, the Euro to British Pound exchange rate recovered on Tuesday evening and Wednesday morning due to fresh uncertainty about next week’s UK general election.

EUR/GBP began the week trading at the level of 0.8730 but dropped to a low of 0.8662 on Tuesday. By Wednesday morning the pair was trending near the week’s opening levels once again.

Demand for the Euro has remained solid despite mixed data so far this week. This has been largely due to weakness in the Pound amid rising election uncertainty.

The biggest drawback for Euro traders this week has been news that inflation throughout the bloc has slowed further than expected in May. While this can partially be explained by Easter being in April, the data still disappointed investors.

Tuesday’s German inflation projections came in at 1.5% year-on-year, missing a forecast 1.6%. The Eurozone’s overall May Consumer Price Index (CPI) projection came in at 1.4% on Wednesday, slowing from 1.9% and missing the forecast 1.5%.

On the other hand, the Eurozone’s unemployment figures have been good this week, beating expectations for the bloc.

Eurozone unemployment unexpectedly improved from 9.4% to 9.3% in April, despite being expected to improve from 9.5% to 9.4%. This was partially due to a solid German unemployment rate, which improved to 5.7% - its lowest on record since the German reunification.

Due to increasing confidence that more people in the Eurozone were finding work, the Euro has been able to largely capitalise against a weak Pound despite lower European Central Bank (ECB) tightening bets for now.

Sterling has performed poorly since last week as the Conservative party’s polling lead over the Labour party continues to narrow. This has shifted the market perception of the UK general election from a dead-cert Conservative party majority to a more uncertain and murky outlook.

Notably, Tuesday morning saw the publication of a YouGov opinion poll indicating that the Conservative party could win as few as 310 seats – below the 326 needed to form a government.

In this scenario, a Labour-Lib Dem coalition would be possible. This would undermine the market’s current Brexit expectations considerably. However, the thing investors dislike most about elections is the uncertainty they bring and uncertainty is definitely worsening.

While most pollsters still project a majority win for the Conservative party, Sterling is likely to remain pressured unless polls begin to move in the Conservatives’ favour again. If they continue to edge towards Labour over the next week, EUR/GBP is likely to continue rising.

Key PMI stats due Thursday through Tuesday will also play a big part in EUR/GBP movement.

Thursday will see the publication of the Eurozone’s final May manufacturing PMIs from Markit, though the Eurozone’s final services and composite prints won’t be published until Tuesday.

Britain’s anticipated May PMIs will also be published and could offer the Pound some support if they impress. Investors will put particular focus on Britain’s services PMI, due on Monday.

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TAGS: Daily Currency Updates Euro Pound Forecasts