Demand for the Euro strengthened sharply at the beginning of the week, responding to the confirmation that President Emmanuel Macron’s La République en Marche secured a parliamentary majority.
This boosted hopes that Macron will be able to push through his promised economic reforms, even though the unions are likely to mobilise against the proposed changes to labour laws.
The initial optimism of markets soon started to fade, though, thanks to the record low turnout, which signals a continued disillusion with politics amongst the French.
As Julien Manceaux, senior economist at ING, noted:
‘Voter turnout, however, was very low which shows that the French people give him the benefit of the doubt rather than a clear-cut mandate for reform. For the next five years, the only opposition he will have to face is therefore likely to come from the streets. We expect reforms to speed up in his first 100 days.’
If public opinion seems to be turning more actively against Macron the Pound Euro exchange rate could find a rallying point, although the general mood is unlikely to shift dramatically in the short term.
A positive showing from the latest Eurozone consumer confidence index could encourage stronger support for the single currency, with the general outlook of the Eurozone likely to have improved in the last month.
Further GBP EUR Volatility Forecast as Brexit Talks Begin
Confidence in the Pound, meanwhile, remained relatively muted as formal Brexit negotiations finally got under way almost a year after the EU referendum.
Hopes remain that the government could moderate its previously hard-line approach to the issue, given the Conservative Party’s lack of a parliamentary majority.
If talks are seen to get off to a civil start this could see the GBP EUR exchange rate entering a bullish run, even though the negotiation process remains long and fraught with potential flashpoints.
The nature of talks is likely to limit the momentum of the Pound, however, with the instability of the UK government setting the stage for a rather volatile Brexit process.
While political developments are set to dominate the outlook of Sterling for the foreseeable future GBP exchange rates could also come under pressure if the latest public sector net borrowing figure proves disappointing.
With the UK economy coming under increasing pressure any uptick in government debt is unlikely to encourage investors, highlighting its continued economic vulnerability.
Following the unexpectedly divided Bank of England (BoE) policy meeting focus will also fall on the latest commentary from Governor Mark Carney.
If Carney indicates that monetary policy is likely to remain loose for some time to come this may weigh on the GBP EUR exchange rate, with the squeeze on consumers set to deepen over the coming months.
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