Pound Pushes Higher Versus Euro as We Head Towards Election Day

The pound has rebounded strongly versus the euro as investors bet on the UK Conservatives winning the general election on Thursday by a comfortable lead. The pound euro exchange rate rallied from a low of €1.1425 to a high of €1.1500, on pound strength before edging back down to €1.1465.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute.
For example, it could be written: 1 GBP = 1.13990 EUR
Here, £1 is equivalent to approximately €1.14. This specifically measures the pound’s worth against the euro. If the euro amount increases in this pairing, it’s positive for the pound.
Or, if you were looking at it the other way around: 1 EUR = 0.87271 GBP
In this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.

With the UK general election just two days away, polls continue to drive trading in the pound euro exchange rate. Interestingly, the pound is reacting more strongly to polls which show a UK Conservative victory than to those that show a hung parliament. The poll which is driving the latest rally was an ICM poll in the Guardian pointing to Theresa May and the UK Conservatives winning by a comfortable 11 percentage point lead over Jeremy Corbyn and Labour.

Not even an unexpectedly weak reading from service sector sentiment was able to knock sterling off its charge northwards. The pound had wobbled in recent weeks as confidence decreased that Theresa May would win a clear victory on June 8th. Polls have been pointing to a wide range of outcomes, from a clear Conservative victory mentioned in Reuters to an assumed hung parliament reported by CNBC. As both extremes are present, it seems the notion that polls can’t always be trusted and don’t always get it right is most definitely true in this case.

Slow start for the euro ahead of a busy week

Demand for the euro was easing off and investors barely acknowledged better than expected service sector sentiment figures. According to a survey of purchasing managers, growth in the eurozone remained at its fastest pace for six years, with both France and Germany driving growth.

Thursday is an important day for the pound with the UK elections, but Thursday is also an important date for the euro. On Thursday, the European Central Bank (ECB) will meet to set the interest rate for the eurozone. Whilst no change is expected to the current rate, the markets are looking for subtle changes in the forward guidance following the recent bout of solid data. Solid figures have added to evidence that the eurozone is enjoying a strong second quarter. Hopes are high that the the ECB will indicate a more willing approach towards tighter policy and eventually higher interest rates. The problem with high hopes is there is plenty of room for disappointment.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. So more local currency used then boosts the demand of that currency, pushing its value higher.

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