GBP to EUR Exchange Rate Climbs in Reaction to German Election Results

September 26, 2017 - Written by David Woodsmith

STORY LINK GBP to EUR Exchange Rate Climbs in Reaction to German Election Results

Despite market disappointment in the latest Brexit developments, Bank of England (BoE) speculation and a weaker Euro have helped the British Pound to Euro exchange rate advance. The Euro has been weak since Monday due to the results of 2017’s German federal election.

A brief spike in Brexit jitters caused GBP/EUR to fall from 1.1377 to 1.1293 last week. Since then though, the pair has recovered much of its losses and briefly touched a two-month-high of 1.1411 on Tuesday morning.

GBP Supported by Bank of England (BoE) Speculation

Investors continue to hope that the Bank of England (BoE) is preparing to tighten UK monetary policy sooner than markets previously expected, due to the surprisingly hawkish tone taken by bank officials since September’s policy decision.

Markets previously bet that the BoE would hike UK interest rates in late-2018 at the latest, but in recent weeks bets of a 2017 rate hike have surged. Many even speculate a hike could come as soon as November.

This has been the primary reason for the Pound’s stronger recovery attempts in recent weeks.

It has also helped investors to overlook fresh concerns about UK-EU Brexit negotiations, which appeared to remain stuck in a deadlock due to disagreements between negotiators.

UK Brexit secretary David Davis has argued that the EU should be open to preliminary trade discussions, in order to help the UK team to better formulate how much it should pay for the UK-EU divorce bill.

However, EU chief negotiator Michel Barnier has reasserted that Britain should make an offer on UK-EU bill payments first.

Barnier has also been firm that the UK would still be under EU law during a Brexit transitionary period, which was proposed in last Friday’s Brexit speech from UK Prime Minister Theresa May.

Sterling saw weaker demand on Tuesday afternoon due to comments from a former Bank of England policymaker. David Blanchflower stated that amid weak economic data, there was no basis for tighter UK interest rates and he warned the BoE against making such a hike.

EUR Weak on Germany’s Political Uncertainties

Germany, the biggest economy in the Eurozone, saw its 2017 federal election held on Sunday and German Chancellor Angela Merkel won a fourth term in office as expected.

However, Merkel’s CDU party won less votes than expected, as did the main opposition party SPD. Much of the lost votes went to Germany’s nationalist party, AfD, causing the AfD to gain enough seats to enter the Bundestag.

Markets are now concerned that with an increased nationalist presence opposing the CDU agenda, Merkel will have a much harder time pushing for a more integrated Eurozone.

As Merkel attempts to enter coalition talks and form a new government, markets are concerned about short-term uncertainty too.

Other factors affecting the Euro this week include news that Catalan is attempting to hold an independence referendum, despite such a referendum being called unconstitutional by Spanish officials.

According to Joshua Mahony, market analyst at IG;

‘The impending Catalonian referendum is certainly a fear for many within the EU, with the result providing the potential for ongoing conflict in the region. Referendums are clearly a major market driver at the moment, with the Iraqi Kurdistan vote being a potential disruption to the region’s oil supply.’

GBP/EUR Forecast: Could the Bank of England Dial Back Hawkishness?

Some analysts have speculated since September’s Bank of England (BoE) decision that the bank was largely attempting to drive the Pound higher and would not actually tighten UK monetary policy.

Ex-BoE member David Blanchflower’s dovish comments on Tuesday caused further speculation that the UK economy may not be able to support tighter interest rates from the bank.

As a result, investors are looking ahead to a Thursday speech from Bank of England Governor Mark Carney for more signals on the bank’s upcoming plans.

If Carney does take a more cautious stance, Sterling could shed some of its recent gains. However, an optimistic tone could leave the Pound strong instead.

Thursday’s session could also be vital for Euro trade, as Germany’s preliminary September inflation data will be published.

As subdued Eurozone inflation has held back the Euro’s strength, a better-than-expected German inflation report could help the shared currency to recover some of its losses since Monday.

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TAGS: Pound Euro Forecasts