Pound to Euro Exchange Rate Plunges in Reaction to UK Hung Parliament

The Pound to Euro exchange rate was edging higher earlier in the week as markets expected a big majority for the Conservative party in the UK general election. However, the election ended in a hung parliament and the Pound plummeted.

GBP/EUR quickly shed over a cent on Thursday evening and Friday morning as the results came in and the pair looked to end the week near the level of 1.14.

As investors had priced in a Conservative majority for the UK general election, the hung parliament news came as a shock and has worsened both Brexit uncertainty and general political uncertainty in the UK.

A stronger Conservative majority would have made it easier for the party to negotiate Brexit smoothly. Concerns are rising about how a weaker government with more obstacles and opponents will negotiate Brexit.

However, a hung parliament raises many questions. For now, UK Prime Minister has opted to remain the Conservative leader and run a minority government, but analysts speculate on whether this will last.

For now, uncertainty is high and the Pound is weak, helping even a weak Euro to recover.

This week’s European Central Bank (ECB) meeting saw the bank cut its Eurozone inflation forecasts for 2017 through 2019. This disappointed investors who had been hoping for higher inflation to eventually pressure the ECB into tightening Eurozone monetary policy.

While the ECB also increased its growth outlook for the bloc and indicated it was no longer considering even looser monetary policy, investors sold the Euro off due to the inflation forecast cut, before buying the Euro back due to Britain’s election news.

Next week will be another busy week for the Pound. Developments on Britain’s government could have a direct impact on the Pound and are likely to be the main potential force of GBP/EUR movement.
However, key data from Britain and the Eurozone will also be published throughout the week. Britain’s May inflation stats will be published on Tuesday, followed by April employment stats on Wednesday and May retail sales on Thursday.

Thursday will also see the Bank of England (BoE) hold its June policy decision. No changes to monetary policy are expected, but if the bank indicates that political uncertainty could lead to even looser policy in the future the Pound will weaken further.

As for next week’s Eurozone news, ZEW will publish its June economic sentiment surveys for Germany and the Eurozone on Tuesday. Wednesday will follow with the Eurozone’s Q1 employment report. Lastly, the Eurozone’s final May inflation results will come in on Friday.

With all the political uncertainty in Britain, the Pound to Euro exchange rate is unlikely to recover much from last week’s drops. However, if any developments cause the Brexit outlook to improve this would give Sterling a boost.