ON POLITICAL TENTERHOOKS
As political events continue to affect exchange rates, Charles Murray considers what the coming months might have in store for GBP/EUR
Initially when Theresa May announced a snap election, the pound rallied as it seemed the PM would gain a larger majority. However, May’s popularity slipped lower and as the exit polls emerged, GBP/EUR sunk from 1.1552 to 1.1376, before tumbling lower to 1.1282.
However, GBP/EUR climbed in mid-June as the Bank of England (BoE) surprised markets with a 5-3 vote to keep interest rates on hold. Markets had only expected one member of the Monetary Policy Committee (MPC) to vote for higher rates, but it seems inflation has put policymakers on edge.
UK inflation currently resides at its highest level since June 2013 at 2.9% in May, up from April’s 2.7%. UK wage growth isn’t keeping pace with inflation and BoE Governor Mark Carney suggested this year will be a squeeze on households.
Looking ahead, politics are likely to play a large part in GBP movement. Both the pound and euro could feel the impact of central bank statements. Additionally, markets will keep an eye on the Greek debt crisis, Italy’s banking woes, and the prospect of an Italian election.