Euro to Pound Falls as Political Question Marks Surface

Euro to Pound Falls as Political Question Marks Surface

The euro’s momentum seem to have stalled so far this week having been unable to protect the impressive gains we saw right up until the end of last month. The single currency is now sitting in the mid 1.20s against the US dollar and has seen it’s fortunes against GBP reverse, with the pound to euro rate back to the mid 1.12s from the low 1.10s last week.

A number of factors could be driving this. Political uncertainty can prove to be a prominent cause because of the variables this brings to the long-term health of the economy in question. The growing pressure over French President Macron’s tenure then could well find itself in the spotlight and drive long term euro weakness. The key behind Macron’s victorious 2017 electoral campaign was the promise for a reformed, modernised approach to politics in France. However, as COVID-19 has continued to weigh on the country’s economy, the President has been cornered into reverting back to traditional formats of distribution of power which has left a number of party members relatively despondent. The further losses last week contributed to the growing tally of 24 so far who have left to start a new party in a bid to follow up on the engaging promises Macron has chosen to pass on. It will be interesting to see how this affects the balance of power in the weeks and months ahead.

Indsutrial Activity Within the Bloc

At the other end of the currency compass, the fragilities within Europe’s interconnected industrial sector has started to come under scrutiny. Most notably, the European Central Bank highlighted at the start of this week the potential repercussions of a drop in production and investment within the car industry. Major players across the block have been forced to rethink their supply chain and their investment strategy in a bid to keep prolonging their survival through the crisis. BMW’s recent decision to suspend their €1bn eastern European expansion is a good example of this. Crucially though, much of the production line for these multinationals is concentrated across eastern European countries whose economy relies heavily on the jobs they create. To date we have seen industrial output crash by over 18% in some member states with falls in Gross Domestic Product (GDP) expected to tally between 5% and 9%.

The stimulus packages being encouraged by the European Central Bank and leader political figureheads also reflect the level of concern. French President Macron committing to a multi billion support fund to incentives car manufacturers to keep their plants open in France rather than shift production to Asia is a good example of this. This morning’s key employment data release could prove to be a market mover then ahead of tomorrow’s potentially pivotal interest rate decision from the European Central Bank. Christine Lagarde has been consistent with her message in promising the ECB will provide as much support as the bloc needs to keep economic activity afloat with a €750bn being touted among European leaders. The question about fair distribution of this could be central to how this might drive euro to pound exchange rates however. If you would like to plan around these releases you can register your interest on the link below.

Importantly, German multinational Lufthansa rejected the proposed bail out option form the German government as it came with a caveat that would have forced them to give up commercial rights over certain pivotal destinations. It will be interesting to see if other public showdowns between government bodies and private corporations surface amidst the current climate.

Positive Trends in Germany to Provide Another Boost for the Euro

There have been a number of positive releases this morning that might reignite the support behind the single currency as we go into the second half of the week however. Importantly the number of unemployment claims slowed to 200k new applications against last month monstrous 373k. Furthermore we have seen improved sentiment across business owners in France and Italy in the services sector, presumably benefitting from the easing of lockdown conditions and the reopening of shops and restaurants. To add to this, it will be interesting to see if the return of tourism also drives euro strength as the month goes on with more and more European governments opening their borders. Germany has committed to opening their doors to its fellow European members as of the 15th of June whilst Italy and Spain have already actively improved conditions for airline companies to reignite activity.

We have also seen an impressive pick up in activity in Germany’s construction sector which has largely been benefiting from the increased monetary support provided by the government as mentioned earlier. The impressive 35% of GDP, as estimated by the International Monetary Fund, has helped rekindle projects across the country

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