Politics Continue to Influence the Direction of the Pound

Xe Corporate Europe

December 3, 20194 min read

The ongoing theme of politics providing the majority factor in the direction of the Pound, continues this week albeit with a fresh iteration. Where previously the Pound reacted to uncertainty about whether or not a Brexit deal will happen, now the Pound is reacting to a proxy factor in its stead: how certain the election result may be on December 12th. As the polls reflected a positive and clear majority for the Conservative Party, the GBP performed with strength due to the ability of the party to enact a deal where they can achieve a majority. However, there has appeared to be more and more support for the opposition party with polls showing that a conservative majority is shrinking; putting pressure on the GBP as the majority (and possible deal) becomes less clear. It seems likely that shrinking support will mean shrinking confidence in a Brexit deal, meaning less GBP confidence.

In balance to this, the Eurozone is contending with political uncertainty of its own. The German government currently is operating as a coalition, but this is at clear risk. The SPD party leader front runners were incumbents that were pro-coalition and pro the coalition terms. However, the shock results of the vote for SPD party leadership resulted in the election of two new individuals who have already clearly stated their intention to renegotiate the terms of the coalition and even suggested that they are seeking major concessions from Merkel’s Christian Democrat party and that they would quit the alliance if need be. Germany being such a dominant force in the single bloc mean this does weigh heavily on the currency. Adding to this are the low and slow development of GDP figures for the EU and so the key factors in deciding the direction of the GBPEUR pair will be resolution of political uncertainty and stimulus measures making their way through the economies.

The Reserve Bank of Australia did not vote to reduce their interest rate, which was widely expected. There is still around a 50% chance that there will be a cut in February and, while the commentary accompanying the rate decision came with a number of warnings concerning the strength of the economy, there will be some interest in how the likelihood polls change between now and then. In the meantime, though, this has meant that in the G10s the AUD has led the charge in terms of basket strength.

The US economic data machine is beginning to print a dichotomy of figures/reports previously upbeat around growth and then delivering underwhelming figures, this time in ISM (Institute for Supply Management) data shows more evidence that the industrial portion of the economy has slowed in the last six months. Construction spending fell in October after receiving a number of key encouraging reports, so there appears to be a lot of hope but not quite executing on this. The result of the recent shortfall versus expectation has led the Federal Reserve in Atlanta to reduce its GDP estimate for Q4 (only last Wednesday this had been pushed up by a huge 1.3% - and does clearly show how quickly the environment has gone from very hopeful to concerned). How long has the EUR to USD rate been pinned down beneath the 1.1050 mark and we have finally started to see a move above this.

Key figures at time of writing:

GBPEUR - 1.1713

GBPUSD - 1.2980

EURUSD - 1.1082

The figures are based on the live mid-market rate, correct as of 09:00 GMT on 03/12//2019, and are provided for indicative purposes only. Live mid-market rates are not available to consumers and are for informational purposes only. The rates we quote for money transfer can be selected via the page on our website ‘Live Money Transfer rates’.

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