Pound/Euro rates have fallen a further cent today, dropping from €1.14 into the €1.12’s before settling back at around the €1.13 mark. (View live graphs by clicking here.) There have been no economic data releases of note, so the fall is simply down to the political and economic uncertainty due to last week’s election resulting in a hung parliament.
The UK is supposed to start Brexit negotiations next week, and while the EU side have set out their stall and are ready to go, the UK side is a bit of a shambles. Without a clear majority, the Conservatives will form a minority government with support from the DUP. In practice, the government are now in a much weaker position both with the Brexit negotiations and in terms of how difficult it will be politically for Theresa May. This uncertainty has led investors to sell the Pound and cause it to weaken.
Could the Pound fall further against the Euro?
I think that the rate could easily fall further. It may be that negotiations have to be delayed for some time, and the latest developments simply mean that investors are not likely to push the Pound higher. Personally I expect lower rates for the next few months. Longer term, once negotiations have made some progress and it becomes clearer what type of deal the UK can agree, it’s likely the Pound will strengthen again, but that’s a few months away. As I mentioned in my pre-election post about the likely outcomes, I think that we’ll probably see a softer Brexit that would have been the case with a conservative majority, and this may also help the Pound in the longer term.
Those that need to buy Euros, for a property purchase for example, can consider locking in the current rate using a ‘Forward Contract’. This allows you to freeze the current rate for up to 2 years by lodging a 10% deposit, and be protected against a further decline in the rate.
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