Euro And The Sterling Pound In Mixed Response To The EU Election Results

Euro And The Sterling Pound In Mixed Response To The EU Election Results - EU flag
Bill Cascade   NEW 29/05/2019 00:00:00 Forex

European Parliament elections results are still streaming in, but the danger of Eurosceptic parties taking the majority seems to have passed. What is apparent from the results is that support for nationalist-populist parties is not as strong as earlier thought. However, the Euro did not capitalize on the result as the Sterling pound took a beating from the latest twist in the Brexit debacle.

The Euro fails to sustain gains

In the early trading sessions on Monday, the Euro gained some ground to settle at $1.1215, which is close to 1% above the two-year lows recorded on Thursday last week. However, the single currency later pared the gains to touch $1.1197. In particular, investors were worried that, despite the resounding defeat to nationalists, center-right and Centre-left left blocs ceded their majority hold on the parliamentary seats.

Staunch pro-European parties like the coalition under France’s En Marche lost to populist nationalists and, as such, the current majority is quite fragmented. The traditional center-ground parties lost to Liberals and Greens. Luckily, the new parties are pro-European, and the union will stay put for five more years.

Further, analysts think that the Eurosceptic parties are now much more divided than they were in the previous parliament. “The gains are simply too small, and it does not look like the parties are set to unite themselves more than they did in the previous parliament,” said a senior economist at ING while referring to the Eurosceptic parties.

The Pound is still not safe from further declines

In Britain, the possibility of a hard Brexit is becoming ever more apparent, if the current European election results are anything to rely on. To be sure, Nigel Farage’s Brexit Party swept the board and left the Conservatives and Labor Party in the Brexit limbo. Certainly, the success of Farage and his ilk, coupled with the recent resignation of PM Theresa May indicate a tough time ahead for traders.

The GBP regained some ground in the wake of May’s resignation announcement after having touched a 4-1/2 month low of 1.2605 on Thursday. However, the GBP pared the gains in the face of the European Parliament elections. On Monday, May 27, 2019, the currency traded down 0.33% at 1.2671 against the US dollar. However, early morning trade in Asia showed the pound trading higher against the EUR. The GBP was quoted at €0.8805, which is 0.1% lower than the previous figure.

Gloomy outlook for the Pound

In light of recent developments which are key to the exchange rate of the Pound, strategists think that this is the best time to short the currency against the EUR. Nomura strategists see minimal chances for the value of the Pound to rebound in the foreseeable future. The strategists cited the political storm following May’s resignation as well as the rapid rise of Nigel Farage’s Brexit Party.

To be sure, there is little in terms of positives for the near term. According to Nomura, chances of a hard Brexit are higher today at 30%. There is only a 30% chance of remaining while the chances of leaving with a favorable deal are at 40%. However, if the hard Brexiteers have their way, the pound sterling will decline 7%, Nomura analysts say.

Interestingly, this is the decline that can be expected in the event of Jeremy Corbyn - the Labour leader - winning the next General Election and becoming Prime Minister: a Corbyn government is believed to be as detrimental for Sterling as a 'no deal' Brexit.

And, there is a 50% chance of an election being called and a 55% chance of Corbyn winning that election, say analysts. A second referendum taking place meanwhile enjoys a 50% chance.

So, convinced are Nomura, further declines in Sterling lie ahead. 

 

 

 

 

 

 

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