GBP/EUR spent most of last week getting very close to €1.20 without managing to sustain a breakthrough; a trend we’ve seen on 6 separate occasions since last summer. It was never very likely that we would see rates breach this level due to it being such a key level of resistance. After the French election result we saw a relief rally in the markets, strengthening the Euro and pushing rates lower. This morning GBP/EUR sits in the mid to high €1.17’s.
If the result was as expected then why did it affect the rate so much?
It wasn’t really much of a surprise. The polls said that Macron and Le Pen would get through with Le Pen getting knocked out in the second round and so far that’s exactly what happened. There had been fears the polls would be wrong, but as the result was exactly in line with what had been forecast, it caused the Euro to strengthen as a wave of relief swept across financial markets that have now cast aside any chance of Le Pen winning.
Given that rates to buy the Euro had risen by more than 5% since March, it was always likely to be a matter of when, and not if, we would see a correction downwards. The signs were already there last Friday when figures showed worse than expected Retail Sales figures, however these were largely ignored while the Pound rode the wave of optimism following Theresa May’s snap election surprise, and were distracted by what the weekend would have in store for France.
That distraction has evaporated and with the French elections now seemingly decided (if the polls are to be believed) I think that market focus will now swing back to how the UK economy is performing. Politically, nobody really expects anything other than a landslide victory for the Conservatives so I think it’s unlikely the initial campaigning will affect the Pound that much. Rather, the markets free of the fear of upsets in the EU can now firmly put the UK back in its sights for clues as to how the upcoming Brexit negotiations may affect the economy. So, after a period of welcome distraction where we’ve been able to focus on elections both home and abroad, I think it’s now back to business as usual, and that business is Brexit ‘uncertainty’.
Politics still to affect the Pound
Of course politics is still going to play its part. As the last year has shown, nobody can trust opinion polls. Who knows, perhaps Le Pen will win and GBP/EUR will rise to €1.25. Perhaps the Conservatives will lose and it will be Labour that forms a coalition. Imagine a world in which Brexit negotiations are to be conducted by Corbyn, Diane Abbott and Shami Chakrabati – without being partisan I think we can safely say the markets would not see it favourably and the Pound would fall significantly! While unlikely, the point is that nobody knows what will happen, either politically or with regards to which way exchange rates will go.
Will Pound/Euro go up or down?
Ultimately the Pound is likely to be driven by economic data, and the Euro will be influenced by any polls showing how the second round in France may go. In simple terms, the more likely it is that Macron will win, the lower Pound/Euro will go. Any surprise swing towards Le Pen would have the opposite effect and push rates higher, but nobody really thinks she’ll win, so based on all the information available at the moment, it’s more likely exchange rates will fall in the coming weeks than shoot back up to €1.20 again. Cast your mind back to March when rates were in the €1.13’s however and you can see that the current levels are actually still quite attractive.
For this reason, if you need to make a currency transfer in the next 6 months therefore, you should be getting in touch to discuss how we can help protect you against the rate moving the wrong way, and also provide you a free quote to compare with your bank, or existing broker, to see how much you can save.