The Pound to Euro exchange rate slumped last week. After initially rising on UK general election hopes, the election result knocked the pair back down.
After hitting its lowest level since November 2016, 1.1309, the pair ended the week at the level of 1.1382.
No party won enough seats at the general election to form a majority government and investors are concerned the new minority government headed up by UK Prime Minister Theresa May will not last. This has left Sterling’s outlook murky.
Pound (GBP) Outlook Damp on Political Uncertainty
Market confidence has slumped since last week’s UK general election, in which UK Prime Minister Theresa May’s plan to expand the Conservative party’s parliamentary majority failed. The Conservatives lost seats, Labour gained seats, and Britain fell into a hung parliament.
The Conservatives, who still won the most seats, have formed a minority government and aim to obtain the backing of Northern Ireland’s Democratic Unionist Party (DUP). Theresa May has remained Britain’s Prime Minister and has been reshuffling her cabinet.
Since the new government was formed however, concerns have risen about the Brexit process as well as a weaker government’s ability to pass economic and fiscal legislations through law.
Criticism of Theresa May following her mishap have also spiked. Both opposing parties as well as some backbenchers within the Conservatives have indicated that they do not believe May’s premiership will last much longer.
On Monday, many analysts suggested that there is still potential for more shifts in Britain’s political situation in the coming weeks. The Institute of Directors (IoD) has also claimed that business confidence has dramatically dropped since the hung parliament result.
With the Brexit negotiations outlook as well as the future of Britain’s Prime Minister uncertain, the Pound has been an unappealing investment.
As a result, this week’s key UK data is likely to take a backseat in terms of driving Pound movement. If the Bank of England’s (BoE) monetary policy decision is more dovish than expected this could weaken the Pound further.
Euro (EUR) in Solid Demand amid Macron Confidence
Last week saw the Euro outlook worsen slightly following the latest European Central Bank (ECB) news. The ECB announced that it was cutting the inflation outlook for the bloc for the next three years, due to weakening oil energy prices.
This weighed on market hopes that inflation would become strong enough to pressure the ECB into tightening Eurozone monetary policy in the foreseeable future.
Investors largely overlooked the ECB’s stronger Eurozone growth forecast, as well as indications that it was now unlikely to loosen Eurozone monetary policy any further.
However, on Monday demand for the shared currency improved again, helping the Euro more easily gain against a weak Pound.
French President Emmanuel Macron’s ‘La République en Marche!’ (LREM) party has seen strong success in the first round of French legislative elections, bolstering market confidence in the new French President’s influence.
This week’s Eurozone data could also shift the Euro outlook. Final May German and Eurozone inflation results will be published and if these beat expectations the shared currency is likely to strengthen.
GBP EUR Interbank Rate
At the time of writing this article, the Pound Euro exchange rate trended in the region of 1.1345. The Euro to Pound exchange rate traded at around 0.8813.
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