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Can Pound Maintain Gains Against Euro, US Dollar as Political Uncertainty Mounts?

Optimism over the anticipated outcome of the UK general election helped to keep the Pound on a stronger footing against its rivals.

With markets continuing to bet that the Conservatives will return to power with a significantly larger majority GBP exchange rates have managed to hold on to a bullish trend throughout much of the week.

Investors are encouraged by the prospect of the government being able to push through Brexit negotiations without having to rely on opposition support.

Even though this raises the odds of the UK suffering a hard exit from the EU the thought of reduced uncertainty has still keep the Pound on a general uptrend.

Despite the current mood, however, Sterling remains vulnerable to downside pressure as the ultimate result of the election is still far from certain and Brexit negotiations are yet to get underway.

As Sean Callow, research analyst at Westpac, noted:

‘The Pound’s bounce is being attributed to the prospect of a larger Tory majority throughout the Brexit negotiations. Yet it is hard to claim that the Pound had been suffering a risk premium linked to May’s position in parliament.

‘The real political risk premium on the Pound is of course still very much intact – what sort of Brexit deal will be negotiated and what happens to the UK economy in the meantime?’

Volatility could equally be in store if Friday’s UK retail sales figures show a loss of momentum, as strong consumer spending has helped to keep the economy in a state of growth in recent months.

Any signs that rising inflation and stagnant wages are having a detrimental impact on households’ ability to spend could encourage a fresh round of Pound selling, with investors likely to engage in some degree of profit taking.

Worries over the French presidential race continued to dominate the outlook of the Euro, meanwhile, as opinion polls remained tight.

Although the odds still favour centrist candidate Emmanuel Macron markets remain nervous over the prospect of Eurosceptic candidates Marine Le Pen or Jean-Luc Melenchon progressing to the second round of voting.

As German producer prices proved disappointing in March there was little reason to favour the single currency on Thursday.

Demand for the Euro could pick up after the weekend, though, if Macron emerges from the first round of the presidential election with a solid level of support.

Federal Reserve interest rate hike expectations have faltered somewhat in recent days, with investors revising their bets for the central bank to raise rates multiple times before the end of the year.

Confidence in the health of the US economy diminished in the wake of disappointing manufacturing production and housing market data, even though the underlying trend remains bullish.

If March’s leading indicators data also points towards slowing growth this could give the Pound US Dollar exchange rate further support.

However, if global geopolitical tensions remain heightened the appeal of the ‘Greenback’ is likely to recover, thanks to its safe-haven status.

Current GBP EUR USD Interbank Exchange Rates

At the time of writing, the Pound Euro exchange rate was trending narrowly at 1.19. Meanwhile, the Pound US Dollar exchange rate was making solid gains around 1.28.