Pound vs Euro at 6 weeks high. Election causing volatility.

Good Morning. Sterling hit a six-week high against a broadly weaker euro and a basket of currencies on Wednesday, but it fell against the dollar after a weaker-than-expected survey on UK services sector activity. Rates @ 08:30am are as follows:

  • GBP/EUR 1.1389
  • GBP/USD 1.5158
  • GBP/CAD 1.5273
  • GBP/AUD 1.6396
  • GBP/NZD 2.1559
  • GBP/CHF 1.6310
  • GBP/ZAR 11.091
  • GBP/JPY 141.03
  • EUR/USD 1.3307

Early in the day yesterday, worse than expected UK Purchasing Managers index data caused the pound to fall. Mainly this was against the US Dollar and other currencies. Against the Euro, concerns about Greece’s parlous fiscal health sent the euro lower against a range of currencies. We ended up the day close to €1.14 which is where it started. This is the best GBP to Euro rate we have seen for 6 weeks.

Concerns about how Greece will fund its large debt is continuing to cause weakness in the Euro. Without this, the pound to Euro rate would actually be a bit lower.

Political Uncertainty
That’s a phrase you are going to hear alot over the next 4 weeks, and this is what is going to be the main driver for exchange rates. Investors were mindful of opinion polls suggesting the UK election on May 6 could result in no one party winning an overall majority, while overnight surveys gave a mixed picture on the UK economy.

The daily YouGov/Sun poll showed the gap between the opposition Conservative Party and the ruling Labour Party narrowed to 8 points. This would make the Conservatives the largest party in parliament, but without an overall majority.

Fears the vote may leave no party in overall control, will make it difficult for the new government to tackle the UK’s deficit. This has pressured sterling in recent weeks, keeping it close to the $1.50 level versus the dollar. As more opinion polls are published, this will move Sterling.

Basically, if polls indicate a hung parliament the pound will fall. If other polls suggest an outright win, the pound is likely to rise.

Today’s Data
The Bank of England and European Central bank both announce their interest rate decisions today. We expect rates to be left on hold in both economic zones. Watch for any underlying comments about the respective economies, as negative sentiment often causes weakness in the respective currency.

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