Foreign Currency Market Update – GBP / EUR Update
A surprise outcome in the UK general election put political uncertainty to one side and paved the way for two-cent appreciation in the Pound to Euro exchange rate last week.
GBP/EUR remained close to the 1.3600 mark at the beginning of last week’s session as British election jitters and downbeat UK construction data weighed on Sterling.
A better-than-expected British service sector score of 59.5 gave the Pound a little bit of a boost on Wednesday, but even though it was the strongest score for eight months Sterling’s gains were limited against the single currency. The Euro, for its part, was bolstered by a 101-month high Spanish service sector report and by news that Greece made a €200 million payment to the IMF, thus avoiding default – for now at least.
However, fears that this year’s general election could have been the closest for decades, and subsequent concerns that Britain could face an undetermined amount of time without a sturdy government, were assuaged on Thursday evening when an unofficial exit poll pointed to a strong turnout for the Conservative party. And as it turned out, the exit poll actually understated the extent to which David Cameron’s Tory party cleaned up at the polls. Although the Conservatives only received around a third of the vote, they managed to secure a majority of seats and this allowed Mr Cameron to form a majority government.
Traders cheered the outcome because it prevented Britain from entering a period of political and economic uncertainty and because it paved the way for a continuation of the Tories’ austerity drive. Sterling rallied by around two cents to 1.3800 in reaction to the news. This left the Greek debt crisis as the big unanswered question and put Sterling on the front foot against the Euro.
Greece is required to pay €770 million to the IMF on Tuesday, in what is just one of a number of upcoming debt repayments that many analysts believe the Hellenic nation will not be able to pay. Unless debt negotiation talks accelerate over the next few days there is every chance that ‘Grexit’ fears will continue to depress demand for the single currency.
Today’s Bank of England rate announcement will almost definitely see the UK central bank leave interest rates on hold at the current rate of 0.50% but Wednesday’s quarterly inflation report could bolster sentiment towards Sterling if it features any hints that rates will be hiked sooner than currently anticipated. An expectedly robust uptick in job creation of 225,000 could also benefit the Pound. But the Euro could gain some respite if GDP data shows that the currency bloc outgrew both Britain and the US with a score of 0.4% in the first quarter.
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