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EUR to GBP Exchange Rate Fails to Hold Ground on Concerning Italian Election Results

March 5, 2018 - Written by Frank Davies

The weekend’s Eurozone political news was mixed and this left the Euro to British Pound (EUR/GBP) exchange rate lower on Monday. The Pound’s strength was bolstered slightly by news that Britain’s services sector had beaten expectations in February but its gains were limited by Brexit concerns.

Due to Brexit uncertainties causing broad weakness in the Pound last week, EUR/GBP surged throughout the week from 0.8801 to 0.8923. Since markets opened on Monday the pair has weakened slightly but remains in the region of 0.89.

EUR Weakened by Market Uncertainty about Italian Election Results

While Eurozone data has continued to be optimistic enough to hint that the Eurozone will continue to see strong growth in the coming months, one of the weekend’s European political events has caused fresh uncertainty in the currency bloc.

Sunday saw Italy go to the polls for the nation’s 2018 general election – and the results caused uncertainty in markets on Monday.

The results revealed a split Italy with over 30% of voters choosing the populist Five Star Movement Party. It became more evident throughout Monday’s European session that Italy was headed for a hung parliament.

Parties are now expected to negotiate potential coalitions, but markets are concerned that coalition talks may not succeed or that a right-wing coalition may not be strong. The success of populist parties also concerned Euro traders.

Still, despite this uncertainty the Euro’s losses against Sterling were not considerable. This is because amid a strong economic backdrop in the Eurozone, as well as the successful formation of a new German ‘grand coalition’, Italy’s uncertainty is being tolerated.

According to Geoffrey Yu from UBS Wealth Management in London;

‘Ultimately, this is expected uncertainty, and the markets are far more tolerant about European politics than earlier given the favorable economic backdrop,’

Market relief that German Chancellor Angela Merkel had finally secured a fourth term in power and another term heading up a CDU/SPD ‘grand coalition’ helped the Euro to avoid further weakness.

On top of this, Monday’s Eurozone ecostats were generally optimistic. Markit’s final February composite PMI came in at 57.1, which fell short of projections but was still a strong figure overall.

GBP Supported against Weaker EUR by UK Services PMI

Thanks to Monday’s stronger than expected UK ecostats, the Pound was able to edge higher against a weak Euro despite revived market concerns about the possibility of a ‘hard Brexit’.

Markit’s UK services PMI was forecast to have improved slightly from 53 to 53.3 in February, but instead jumped to a stronger 54.5. This was the print’s best figure in four months and it was boosted by growth and hiring in new businesses.

Thanks to the stronger services results, the overall composite PMI beat expectations too and rose from 53.5 to 54.5.

According to Duncan Brock from the Chartered Institute of Procurement & Supply;

‘A complex array of forces were at play in the UK services sector last month resulting in the fastest rise in new orders since May 2017 but also hindered by continued consumer caution over spending.

In fact it was business customers that had the confidence to forge ahead with orders, as consumers hesitated over concerns about possible rate rises impacting on their household budgets and what the future could hold.’

EUR/GBP Forecast: Eurozone News Could Drive Pair’s Movement This Week

Unless there are developments in the Brexit process in the coming days, major Eurozone news is likely to drive the Euro to British Pound (EUR/GBP) exchange rate for most of the week.

Markets will of course pay close attention to the possibility of developments in Italy, with the nation’s political parties expected to begin negotiations in attempt to form a new government and end the hung parliament.

However, upcoming Eurozone ecostats and a Thursday meeting from the European Central Bank (ECB) are likely to influence Euro trade too.

Wednesday will see the publication of the Eurozone’s third Q4 Gross Domestic Product (GDP) projections. Eurozone growth is expected to have slowed from 2.8% to 2.7% year-on-year.

Thursday’s ECB policy decision could be the biggest event of the week for Euro investors. If the bank shows any signs of hawkishness in regards to recently strong Eurozone data the Euro could see stronger performance by the end of the week.

On the other hand, if the ECB expresses concern over the past week’s US trade tariff news, or the results of Italy’s election, the Euro could weaken.
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