The GBP/EUR exchange rate slumped to a fresh four-month low this week as UK political turmoil saw investors shun the Pound.
Sterling Plummets as No-Deal Brexit Risks Rise
The Pound to Euro exchange rate continued to trend lower this week, with political uncertainty in the UK resulting in the pairing suffering its worst monthly slide in over two years.
Following Theresa May’s resignation announcement, the political jostling between Conservative leadership candidates got underway this week, resulting in GBP investors speculating on who may become the next Prime Minister and how they may shape Brexit.
Unfortunately this saw Sterling sentiment sink as analysts warned that the high odds of a hardline Brexiteer becoming PM increases the risks of a no-deal Brexit.
Meanwhile, the Euro’s gains last week were mainly driven by weakness in the Pound at the tail end of the session, as the single currency stall through much of the week following the fallout from the European elections.
While the pro-EU block was able to retain control of the European parliament, significant inroads by Eurosceptic parties prompted concerns that the EU will have to water down plans for further integration.
On top of this EUR investors were worried about a potential clash between the EU and Italy as Italian Deputy PM Matteo Salvini, emboldened by his party’s strong performance in the European elections, renewed calls for the EU to change its fiscal rules.
Will a Dovish ECB Sink the Euro?
Looking ahead to next week, we may see the GBP/EUR exchange rate attempt to rally as the European Central Bank’s (ECB) June policy meeting has the potential to undermine the Euro next week.
While no policy changes are expected from the bank in June, analysts expect the ECB to continue to warn of downside risks facing the Eurozone, likely pressuring EUR exchange rates as it reinforces its dovish outlook for 2019.
However the Pound may struggle to capitalise on any weakness in the Euro as its faces its own hurdles, start with the UK’s latest PMI figures, which are expected to show that growth in the private sector remained flat through May.
On top of this, the political uncertainty in the UK is likely to persist over the coming weeks as the Conservative leadership election officially gets underway once Theresa May steps down as leader on 7 June.