GBP/EUR: Traders React To European Parliamentary Elections

The increased threat of hard-line Brexiteer Boris Johnson succeeding Prime Minister Theresa May sent the pound skidding lower across the previous week. The pound tumbled 0.5%, its third straight losing week, hitting a four-month low of €1.1297. As the results of the European Parliamentary election came in at the start of the new week, the pound euro exchange rate remained under pressure.

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.

Nigel Farage’s Brexit party stormed to victory in the European elections in the UK. Support for the Conservatives and Labour collapsed. However, the Liberal Democrats also performed well exposing the deep divide in public opinion over Brexit. Votes are sitting quite clearly between a party which favours Brexit and one that favours a second referendum. The results of the election suggest that with a country still so deeply divided, any compromise in Westminster is very unlikely.

In the wake of Nigel Farage’s success, UK Conservative Eurosceptics will now clamour for a leader to take the UK out of the UK in October, with or without a deal. Meanwhile over in Europe, wins by pro-EU parties have dashed any hopes of any changes to the current negotiated Brexit deal.

Why is a “soft” Brexit better for sterling than a “hard” Brexit?
A soft Brexit implies anything less than UK’s complete withdrawal from the EU. For example, it could mean the UK retains some form of membership to the European Union single market in exchange for some free movement of people, i.e. immigration. This is considered more positive than a “hard” Brexit, which is a full severance from the EU. The reason “soft” is considered more pound-friendly is because the economic impact would be lower. If there is less negative impact on the economy, foreign investors will continue to invest in the UK. As investment requires local currency, this increased demand for the pound then boosts its value.

With the UK conservative leadership battle is set to run until late July. The prospects of any political clarity remain limited.

Euro Supported By European Parliamentary Election Results

The euro was broadly in favour at the start of the new week as investors digested the results from the European Parliamentary elections. The failure of big populist parties to win big in the European elections is offered support to the euro on Monday. The elections over the weekend showed that the centrist bloc saw their share slump, their votes have largely transferred to other pro-EU groups. Right wing populists such as the UK’s Brexit party and France’s Le Pen’s National Rally in France only make up around a quarter of the new European Parliament. This doesn’t give them a loud enough voice to create problems in European Parliament and block legislation.

Today European leaders will be meeting to discuss potential candidates for the European Central Bank. Investors will be watching closely. Depending on the ideological makeup of the most popular candidates, the most popular candidates could actually undermine confidence in the currency.

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