The Pound may currently be trading around a five-month high against the Euro thanks to the announcement of a snap UK general election, but French politics could soon put the common currency back in charge of the GBP EUR pairing.
Theresa May yesterday stunned markets with the surprise announcement of a general election, which will take place on the 8th of June.
May had ruled out calling an election on several different occasions since becoming Prime Minister when David Cameron resigned just after the referendum.
However, sources inside No.10 have apparently revealed that concern Jeremy Corbyn may soon step down as Labour leader spurred the Prime Minister to act, rather than face the prospect of a left united under a strong Labour candidate in 2020.
Expectations that the election will cement the Conservative’s strong majority, lowering political interference in the House of Commons from the opposition, pushed the GBP EUR exchange rate to its highest point since the beginning of December 2016.
Additionally, markets saw the potential for a strong election victory to give Theresa May more clout when standing up to the hard-line Brexiters within her cabinet, which may soften her stance in the EU negotiations and allow the UK to avoid a full, ‘hard Brexit’.
But before the general election is held, French citizens will head to the polls in two rounds of voting to choose the country’s next President.
The upcoming vote has caused much consternation amongst investors, due to the potential for the final round to offer a choice of two candidates who both have anti-EU leanings.
The candidates are – in order of their current popularity as of the latest polls – Emmanuel Macron, a centrist, Marine Le Pen, of the far-right, Francois Fillon, a conservative, and Jean-Luc Melenchon, a leftist.
Le Pen wants to take France out of the Eurozone by reintroducing the Franc, while Melenchon may hold an EU membership referendum.
Only two candidates can make it through on Sunday 23rd April to face the second round of voting on May 7th.
From a market perspective, the ideal second round face-off would be between Macron and Fillon, as these are the least disruptive options and neither threatens the overall integrity of the EU or Eurozone.
If this is the result of the first round of voting, the Euro is likely to surge higher, cutting into the recent GBP EUR strength, as the worst fears of investors will have been alleviated.
The worse combination, as far as traders are concerned, would be for Le Pen to be pitted against Melenchon, as this would leave voters with no choice but to opt for a candidate who is likely to withdraw from, or seriously disrupt, the Eurozone or European Union.
Were this to happen, the Euro could weaken further, allowing GBP EUR to climb as the UK general election approaches.
Investors will still get jittery before the UK goes to the polls, however, so even if the Pound Euro exchange rate is in a position of strength come the end of May, it is likely to soften in the weeks preceding the vote.
At the time of writing, the GBP EUR exchange rate was trending in the region of 1.1970.