The Pound to Euro exchange rate strengthened by four cents last week as Donald Trump’s surprise election victory stoked fears of a wave of political populism in Europe.
Shock Trump Victory Wrong Foots Markets
GBP/EUR initially tumbled a cent in reaction to Trump’s election result. However, the mood shifted swiftly and Sterling began appreciating versus the single currency.
There are a number of repercussions from the US election but one of the biggest factors for the Euro is the threat of political instability. With the ‘Brexit’ vote and the Trump Presidency grabbing the headlines this year, commentators are fearful that other right-wing populist parties may gain support. The trend of inward looking policy and protectionism obviously bodes ill for the currency bloc, which only a year ago managed to banish the existential threat of losing Greece as a member state.
The most immediate threat is an Italian referendum early next month on constitutional reform, which Prime Minister Matteo Renzi has stated he will resign after if he is defeated. Further out we have the French Presidential elections in April, which could see a galvanised Marine Le Pen push for a French exit from the EU. Then in the second half of the year German Chancellor Angela Merkel’s position could come into contention as anti-migrant sentiment fuels nationalist parties.
So, after months of ‘Brexit’ related political issues dogging the Pound, markets are now focussing on the possibility that the Eurozone could unravel due to a global wave of populist nationalism.
Trump Benefits Britain
The single currency was also hurt by comments from European Central Bank policymaker Ewald Nowotny, suggesting that prolonged volatility could lead to looser monetary policy in Europe. ‘We are definitely prepared to intervene in an emergency’, he said.
By the end of the week GBP/EUR had rallied from 1.12 to 1.16 as political uncertainty crushed the Euro and hopes that Donald Trump would agree on an exclusive trade deal with Britain to maintain the UK-US ‘special relationship’ bolstered the appeal of Sterling.
Week Ahead
With the Pound to Euro exchange rate currently trading at a seven-week high it is entirely likely that profit-taking could eat into Sterling’s gains over the next few days.
Domestic ecostats are expected to print positively, with retail sales set to rise 0.4%, inflation set to accelerate from 1.0% to 1.1% and wage growth tipped to print at 2.3%. However, the UK’s long term growth prospects are not so rosy and subsequently we may not see investors buying the Pound in reaction to backward-looking data.