The Pound to Euro exchange rate has plummeted this week despite otherwise solid Pound demand, as political jitters around the Euro lighten due to the weekend’s French Presidential election news.
GBP EUR has slumped from 1.19 to 1.17 this week and on Wednesday was trending near its worst levels in over two weeks.
The outlooks for both the Pound and the Euro have improved significantly over the last two weeks, but depending on the outcome of the French Presidential election second round the Euro’s outlook may become even higher.
The Eurozone economy has been on a slow and steady recovery path. Recent months have seen more analysts argue that the European Central Bank (ECB) should consider discussing tightening Eurozone monetary policy in the coming year.
Some speculate that the ECB could even show a more hawkish tone in this week’s policy decision due to abating political jitters, which would certainly give the Euro another boost.
Political uncertainties have been a huge concern for economists in the Euro bloc though. Last year’s Brexit and Trump votes increased concerns that nationalist mentality was becoming more popular and could lead a key Eurozone nation to withdraw from the bloc and undermine the shared currency completely.
Nowhere was this more apparent than in the run up to the French Presidential elections, with anti-EU far-right Marine Le Pen being compared to US President Donald Trump in terms of protectionist policy as well as rising popularity.
The first round of the election saw pro-EU centrist candidate Emmanuel Macron come first, increasing hopes that he could also win the second round and decreasing concerns that Le Pen could pull France out of the Eurozone in a ‘Frexit’.
However, last year’s surprising votes increased market caution and there are many analysts warning that a Le Pen win is still a possibility – especially if she is able to gain more support in the coming weeks. As a result, Macron is not fully priced in markets as the next President of France.
This ultimately means that if Macron does win the second round of the election on the 7th of May, the Pound Euro exchange rate has room to plummet once more.
In this outcome, Eurozone political jitters will have essentially evaporated and Euro trade will become highly focused on economic factors again – most of which are looking more optimistic. The Euro outlook will soar.
On the other hand, the Euro outlook changes dramatically for the worse in the case of a surprise Le Pen victory. Bets of a ‘Frexit’ would soar and some analysts will go as far as to argue that the shared currency could unravel without France in the currency bloc.
The Pound’s outlook is steadier in comparison. Analysts and markets widely expect UK Prime Minister Theresa May will easily expand her Conservative government’s majority in the upcoming election.
The main long-term influence for the Pound outlook will be upcoming data. Recent data has been solid but has indicated that Britain’s economy is beginning to slow down, increasing analyst claims that the Brexit vote would eventually damage Britain’s economy.
If UK inflation continues to rise, wage growth continues to slow and retail sales continue to fall, investors will become increasingly concerned that Britain’s economy will slow down in 2017. This could weaken the long-term Pound outlook.
Of course, an unexpected voter swing in the UK election could also destabilize Pound movement.
At the time of writing this article, the Pound to Euro exchange rate trended in the region of 1.17. The Euro to Pound exchange rate traded at around 0.85.
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