Pound to Euro Exchange Rate Recovers as Fears of UK Leadership Challenge Lighten
UK Prime Minister Theresa May seems to have survived a series of high-profile resignations from her government cabinet that took place at the beginning of the week, helping the Pound Sterling to Euro (GBP/EUR) exchange rate to recover from a Monday dip.
Since its late-June losses, GBP/EUR has been trending relatively tightly as Brexit jitters weigh heavily on the Pound (GBP). Last week, GBP/EUR edged higher from 1.1296 to 1.1390.
On Monday, GBP/EUR briefly tumbled to a quarterly low of 1.1245 as UK political jitters surged. However, the pair recovered from its worst levels and on Tuesday mounted a more solid recovery to around the week’s opening levels.
By far the biggest news and Pound-mover this week has been the UK political developments since the beginning of the week.
David Davis resigned as UK Brexit Secretary on Sunday night over disagreement with the government’s Brexit plan, while Boris Johnson resigned as Foreign Secretary on Monday.
Pound (GBP) Exchange Rates Recover from Lows on Signs of Political Stability
Following the shocking resignations of the UK Brexit and Foreign Secretaries on Monday, the Pound plunged amid concerns that UK Prime Minister Theresa May’s position was weakening.
Investors became concerned that May could face a leadership challenge from Conservative rebels favouring a harder Brexit.
In the event that May lost a no-confidence vote, a fresh leadership contest could have seen a more pro-Brexit MP become Prime Minister. The uncertainty surrounding May’s leadership and hard Brexit concerns weighed heavily on the Pound on Monday.
On Tuesday though, May met with her newly shuffled cabinet and analysts perceived little signs that her position would be undermined. According to Esther Maria Reichelt from Commerzbank:
‘The market is worried that yesterday’s resignations could be a sign of major instability within the British government. However, we see little indication of that and assume May will survive and restart negotiations with Brussels… Sterling should correct its losses,’
On top of that, Sterling was supported on Tuesday by the latest UK growth result. The first monthly growth publication showed that Britain’s GDP growth rate improved from 0.2% to 0.3% in May.
Euro (EUR) Exchange Rates Pressured by ZEW’s Economic Sentiment Indexes
While the Euro (EUR) was supported on Monday by some solid German trade stats and a surprisingly strong Eurozone investor confidence survey from Sentix, underwhelming stats on Tuesday made it easier for the Pound to Euro (GBP/EUR) exchange rate to advance.
Tuesday saw the publication of ZEW’s July economic sentiment survey results for Germany and the Eurozone, which all fell short of expectations.
German economic sentiment plunged from -16.1 to -24.7, well below the forecast -18, while current conditions fell from 80.6 to 72.4.
The Eurozone print was similarly disappointing, slumping from -12.6 to -18.7 rather than the predicted -13.2.
Commenting on the report, ZEW President Professor Achim Wambach said that US trade jitters and the escalating trade war were overshadowing optimistic domestic performance.
Pound to Euro Forecast: Political and Central Bank Developments to Influence GBP/EUR
The Pound to Euro (GBP/EUR) exchange rate may be in for another week of tight trade this week, if political and economic uncertainties continue to put pressure on both currencies.
Wednesday will be relatively uneventful in terms of economic data, but many high-ranking Central Bank officials will be holding speeches which could influence a shift in the Pound to Euro exchange rate.
European Central Bank (ECB) President Mario Draghi and ECB Chief Economist Peter Praet will be holding speeches in the morning, followed by a speech from Bank of England (BoE) Governor Mark Carney in the evening.
If the officials make any surprising comments regarding monetary policy this is likely to influence GBP/EUR. In particular, investors will be looking for Carney’s view on the latest UK growth data.
Of course, while UK politics are perceived to have calmed somewhat there is still potential for surprising developments in the coming days.
Any further signs of high profile resignations in the UK government, or the possibility of a leadership challenge, could cause the Pound to Euro (GBP/EUR) exchange rate to plummet.