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Pound Euro Exchange Rate Fails to Recover Amid ‘Hung Parliament’ Speculation

  • Pound Euro Back at 1.14 – Drops back to week’s opening levels
  • YouGov Indicates Conservatives could Lose Majority – New poll methodology spooks markets
  • GBP Forecast: UK PMIs Ahead – Services on Monday
  • EUR Forecast: Final May PMIs – Composite figures and April retail sales due on Tuesday

Thursday’s UK and Eurozone data was unable to give the Pound Euro exchange rate any significant boost and the exchange rate continued to trend closely to the week’s opening levels.

After a short recovery attempt on Wednesday night and Thursday morning, the pair once again trended in the region of 1.1450.

The Pound was held back by some of this week’s UK general election polls, which indicated the gap between the Conservative and Labour party was still narrowing. A YouGov poll published on Wednesday evening had the parties within three points of each other.

As a result, Sterling was unable to benefit from Thursday’s UK manufacturing PMI for May. Markit’s report was predicted to drop from 57.3 to 56.5, but merely slipped to a better-than-expected 56.7.

[Published 06:00 BST 01/06/2017]

A new polling methodology attempted by YouGov has left the Pound Euro exchange rate weaker since Tuesday. These polls projected that the UK Conservative party could actually lose seats and its parliamentary majority, which has added another level of uncertainty to GBP trade.

GBP EUR began the week trading at around 1.1451. After briefly touching a high of 1.1544 on Tuesday, the pair tumbled again and on Wednesday was trading near a weekly low of 1.1434.

Pound (GBP) Slumps on Heightened Election Uncertainty

A UK general election previously perceived to be a one-horse-race has unexpectedly tightened in recent weeks, with the Conservative party seemingly shedding popularity and the opposition Labour party gaining.

This has significantly worsened uncertainty in UK markets with just a week to go until the UK public head to the polls for Election Day.

The possibility of a ‘hung parliament’ is a real one, according to a controversial new polling methodology from YouGov. The poll report, which aims to indicate how many seats each party could win, projected the Conservative party could center around 310 seats but get as many as 345.

In the scenario the Tories get around 310 seats, this would put them below the 326 seats needed to form a government.

Some outcomes of this situation include the possibility of a Labour LibDem coalition. This may actually result in a softer Brexit with the parties aiming for single market access and freedom of movement.

However, ultimately many analysts suggest that the poll shouldn’t be given too much attention due to its large margin of error in attempting to predict the results of each constituency in Britain. Most other polls still show the Conservative party with a solid majority. According to a Wednesday statement from Geoffrey Yu from UBS Wealth Management;

‘today’s poll distracts from the many others showing that a Conservative majority remains the most likely outcome, as is our base case. With no further indications of a hung parliament, the recent fall in sterling may be seen as a buying opportunity for investors.’

Euro (EUR) Bolstered by Unemployment Data

This week’s Eurozone data has indicated that inflation in the bloc has slowed further than expected. As a result, investor hopes that the European Central Bank (ECB) may be pressured into tightening monetary policy have been quashed for now.

Germany’s preliminary May Consumer Price Index (CPI) projection slowed from 2% to 1.5% year-on-year and Eurozone inflation slowed from 1.9% to 1.4%. Both of these results were below forecast.

Despite this, the shared currency remains in solid demand this week, largely due to weakness in the Pound and other Eurozone stats impressing.

Wednesday saw the publication of Germany’s May unemployment rate, which improved from 5.8% to 5.7%. This was Germany’s best level of unemployment since the German reunification.

The Eurozone’s April unemployment rate beat expectations, improving from a revised 9.4% to 9.3% despite being projected to improve from 9.5% to 9.4%.

Pound Euro Forecast: Final May PMI Results Ahead

Britain and the Eurozone’s final May PMI reports from Markit will be published Thursday through Tuesday and are likely to influence the Pound Euro exchange rate somewhat.

Manufacturing stats for both Britain and the Eurozone will be published on Thursday, followed by UK construction on Friday. Britain’s key services PMI will be published on Monday and the Eurozone’s services prints will come in on Tuesday.

As services make up most of Britain’s economic activity, Monday’s services data will impact the Pound if it surprises investors.

However, GBP traders are more likely to react to any further developments in UK general election polling.

Polls published on Tuesday and Wednesday this week have already indicated how sensitive the Pound has become to shifts in political outlook.

If the Conservative party begins to rebound in polls and increase bets of a strong parliamentary majority for the party, Sterling will cool and could firm as the election date approaches.

On the other hand, if more polls show the Labour party gaining on the Conservatives, the Pound will become jittery.

As well as being the week of the UK general election, next week will also see the European Central Bank (ECB) hold its June policy decision, which could inspire Pound Euro movement if it surprises.