The Pound to Euro exchange rate tumbled to a two-and-a-half-month low last week as political tensions heightened ahead of this week’s general election.
Greek Debt Crisis Simmers
Sterling strengthened against the single currency at the beginning of last week’s session as traders reacted to a statement from Greek finance minister Euclid Tsakalotos calling for debt relief in June. Some traders interpreted the comments as a threat that Greece would default on its next bond repayment if the embattled Hellenic nation was not granted the debt relief that most economists believe is crucial to bringing Greek debt back to sustainable levels. Greek politicians distanced themselves from rumours of a potential default but maintained that debt relief should be agreed by the end of the month.
Also weighing on the single currency was a drop-off in German CPI from 2.0% to 1.4%, which drove the Eurozone inflation index from 1.9% to 1.4%. Demand for the Euro weakened in response to the results, which were seen to increase the likelihood of sustained low interest rates and quantitative easing from the European Central Bank.
UK Private Sector Slows
Over the last week we have seen three UK PMI reports. Manufacturing output impressed at 56.7, construction activity struck a two-and-a-half-year high of 56.0, however, the dominant service sector slowed from 55.8 to 53.8, which drove the composite private sector index down to a three-month low of 54.5. The disappointing services report suggests that domestic growth could remain subdued in the second quarter.
Election Jitters Weigh
GBP/EUR fluctuated last week in response to new opinion polls showing that Conservative leader Theresa May’s lead over Labour’s Jeremy Corbyn has narrowed significantly. The Pound touched a two-and-a-half-month low at the start of this week’s session as political tensions heightened following the horrific attack in London.
We are likely to see further volatility as Thursday’s election approaches, with strong Tory polls likely to boost the Pound and predictions for a hung parliament likely to weigh on Sterling. However, historically, the Pound has often rallied in advance of a Conservative victory and then steadily fallen afterwards.
If Labour, or a coalition of left-leaning parties led by Labour, came into government the chances of a ‘soft’ Brexit with retained single market access would increase, meaning we could actually see Sterling strengthen once the dust settles from what would be an unexpected result.
Also on the agenda this week is a meeting at the ECB, which is likely to see monetary policy remain accommodative. Some investors are hoping for interest rate rise hints from ECB President Mario Draghi, meaning we could see a little bit of pressure on the single currency if Draghi disappoints. Given that Eurozone inflation recently slowed, it appears likely that the ECB will err on the side of caution and deliver a more dovish message.