Confidence in the Pound weakened substantially overnight as the results of the UK general election caught markets off-guard.
As investors had been strongly confident in the likelihood of an increased Conservative majority GBP exchange rates slumped sharply in response to the exit polls.
The prospect of a hung parliament was largely discounted in the final days of the election campaign, prompting a significant correction for the Pound once the final outcome of the vote became clear.
With the Conservatives having lost their previous slim majority in parliament a sense of political uncertainty weighed heavily on Sterling.
This result creates further doubt ahead of the imminent start to Brexit negotiations, raising the odds of a chaotic exit process and a less favourable deal for the UK.
While the Pound Euro exchange rate stabilised somewhat on Friday morning, as markets continue to assess the damage of the election, the potential for further downside weakness remains.
Fears that another election may follow could hamper demand for the Pound further, as analysts at ING noted:
‘It’s impossible to say what another election would mean for Brexit in the long-run. But the loss of time in the Article 50 process could be detrimental to the UK’s Brexit negotiations and would intensify the need for a transitional deal.’
Markets are likely to remain sensitive to political developments in the short term, leaving the GBP EUR exchange rate vulnerable.
Success for En Marche Forecast to Boost Euro Higher
The Euro saw some volatility ahead of the weekend, meanwhile, thanks to the latest European Central Bank (ECB) policy meeting.
Although the ECB dropped the mention of lower interest rates in its statement policymakers also revised its inflation forecasts down.
This indicated that a return to a monetary tightening bias remains a relatively distant prospect, limiting the appeal of the single currency.
Investors were also disappointed that Germany’s trade surplus showed an unexpectedly sharp contraction in April, narrowing from 25.3 billion to 18.1 billion.
A strong uptick in imports fuelled this narrowing, undermining confidence in the strength of the Eurozone’s powerhouse economy.
The first round of the French parliamentary elections could provoke jitters for the Euro over the weekend, potentially offering support to the GBP EUR exchange rate.
If President Emmanuel Macron’s fledgling En Marche movement makes significant inroads at this juncture, though, the single currency could trend higher across the board.
Signs that the centrist Macron is likely to have parliamentary support for his ambitious political agenda could bode well for the outlook of the Eurozone as a whole, dispelling the threat of Euroscepticism further.
Current GBP EUR Interbank Exchange Rates
At the time of writing, the Pound Euro exchange rate was trending in the region of 1.14. Meanwhile, the Euro Pound exchange was shedding some of its earlier gains at 0.87.
Comments are closed.