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Pound to Euro: Exchange Rate Slips as UK PM Theresa May Survives No Confidence Vote

December 12, 2018 - Written by Toni Johnson

GBP/EUR Exchange Rate Jumps Back to €1.11 On News of No-Confidence Vote

 The expectation that Prime Minister Theresa May will survive tonight’s vote of no confidence sent the Pound soaring on Wednesday, with GBP/EUR jumping 0.7% to trade in the region of €1.1115.
The outcome of the vote is likely to encourage further movement ahead of tomorrow’s German inflation data and European Central Bank (ECB) rate decision.

Despite the surge in UK political uncertainty today, the British Pound to Euro (GBP/EUR) exchange rate has actually recovered a notable chunk of this week’s losses. Market expectations that UK Prime Minister Theresa May will successfully see off a no-confidence vote made Pound investors more confident despite persisting Brexit uncertainties.

Since opening this week at the level of 1.1175, GBP/EUR has tumbled. GBP/EUR briefly touched on a three month low of 1.1010 on Monday evening before beginning recovery attempts. At the time of writing on Wednesday afternoon, GBP/EUR trended in the region of 1.1107 – still over half a cent below the week’s opening levels.

GBP Exchange Rates Rally on Expectations for UK Prime Minister to Survive No Confidence Challenge

Brexit turmoil and uncertainty intensified today – but despite this the Pound ended up rallying for most of the day.

In the morning, the UK Conservative Party’s 1922 Committee Chairman had finally received over 48 letters of no confidence in UK Prime Minister Theresa May.

As more than 15% of the party had handed in no confidence letters, this activated a no confidence vote against the Prime Minister which is due to take place this evening.

Despite the fresh uncertainty this brought regarding UK politics and the Brexit outlook, Sterling advanced for most of the day as markets generally bet that UK Prime Minister Theresa May would smoothly win the no confidence vote and maintain her hold on the Conservative Party.

According to Valentin Marinov, Head of G10 Currency Strategy at Credit Agricole:

‘While the risk of ousting PM May has clearly increased, I don’t think that there is a credible candidate to replace the PM and who can make the no confidence vote successful,’

The likelihood of a win for Prime Minister May has done little to offset the broad uncertainties that persist about the Brexit process itself however. According to Adam Marshall, Director General at the British Chambers of Commerce:

‘Our firms are worried, investors around the world are baffled and disappointed, and markets are showing serious strain as this political saga goes on and on.’

EUR Exchange Rates Avoid Further Losses as Eurozone Factory Data Beats Forecasts

The Pound to Euro exchange rate was making a strong recovery at the time of writing, but the Pound’s gains versus the Euro were slightly limited by the morning’s stronger than expected Eurozone data.

Eurozone industrial production stats from October improved from -0.6% to 0.2% month-on-month as forecast, but the yearly print unexpectedly jumped from 0.8% to 1.2% - well above the expected 0.7%.

It followed weaker Eurozone data earlier in the week, and indicated that the Eurozone’s economic activity was weathering US-China trade jitters.

Some investors even speculated that the data pointed towards stronger Eurozone growth in Q4.

Weakness in the US Dollar (USD), which has a negative correlation with the Euro, also supported Euro strength on Wednesday.

Despite the GBP/EUR surge, the Euro was one of the major currencies the Pound advanced the least against.

GBP/EUR Exchange Rate Forecast: European Central Bank (ECB) in Focus after UK No Confidence Vote

With UK Prime Minister Theresa May seemingly securing enough public backing to smoothly win this evening’s no-confidence vote and maintain control of the Conservative Party for the time being, the Pound may sustain most of today’s gains.

However, Brexit uncertainties persist and will continue to influence the Pound to Euro exchange rate in the coming sessions.

If Brexit uncertainties worsen again, for example if UK Prime Minister Theresa May is unable to secure the votes needed to pass her UK-EU Brexit deal through UK Parliament, the Pound may weaken.

Euro investors, on the other hand, will be focused on Thursday’s slew of influential Eurozone events including inflation figures and the European Central Bank’s (ECB) December policy decision,

Consumer Price Index (CPI) inflation data from German and France will be published on Thursday, which could bolster ECB interest rate hike speculation if they beat expectations.

However, the tone the bank takes in its policy decision regarding its 2019 monetary policy outlook could be even more influential for ECB interest rate hike bets and the Pound to Euro exchange rate.
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