A weakening majority for the Conservative Party and a hung parliament for the UK resulted to Sterling’s downtrend steepening last week as the General Election results confirmed the worst scenario of recent polling data. Euro also had a negative week against its American counterpart but it’s more of a correction during its 10-week rally.
Can Sterling weaken more this week against the Eurozone currency?
Sterling’s freefall stopped at 1.138 during a very volatile – as expected – week, especially on election day, when GBPEUR climbed to 1.155 but plunged to 1.135 by the end of day. Increased volatility continued on Friday as well, with indecisive investors trading between 1.13 and 1.145!
The market was somewhat surprised by the exit polls and by the time official results were known, Sterling to Euro exchange rate was printing its 6-month low. The decline wasn’t as big as other upsets such as Brexit voting though, mainly because opinion polls showed Conservative Party’s percentage declining for weeks prior to the election. As polling data suggested a weaker majority for Theresa May, Sterling suffered losses all this time.
Final result simply confirmed that trend, therefore traders weren’t caught by surprise on Thursday, who maybe didn’t expect the hung parliament scenario that much and had their bets on the lessened majority. The quick reach out to the Democratic Unionist Party by Theresa May had the most impact on Friday’s action and most probably is the reason for the temporary downtrend’s pause.
Politics will remain hugely in focus this week for Sterling as well, despite significant data being reported for the UK economy, such as May inflation and unemployment data. Retail sales release on Thursday may accelerate Pound’s fall as it is forecast to show a slowdown, while the Bank of England meeting on the same day is expected to go mostly unnoticed by GBP investors, given no policy change is anticipated.
Political uncertainty, fueled by the fragile Conservative-DUP potential collation will drive Sterling’s exchange rate, with the Brexit negotiations formally starting very soon. The threat of a hard Brexit continues to hang over the country and UK seems less likely to secure a positive deal.
Technically speaking, GBPEUR is trading in the support zone of 1.13-1.14, which we predicted in last week’s analysis. Several experts seem confused at this point as their opinions are mixed whether Sterling will bounce at this point, or support will fail. Granted, support and buying power has shown great strength at this level twice in 2017. Yet, who can ignore the powerful GBPEUR downtrend that Macron’s win in France set off in April, which hasn’t slowed down one bit?
Friday’s indecision cannot keep up and depending on Monday and Tuesday’s action, we’ll know if GBPEUR will be nosediving to 1.10 or GBP buyers will manage to take control of the market.
Euro slid last week and lost 0.63% against the US dollar, closing just a nod below 1.12 on Friday evening.
Unsurprisingly, Euro met resistance at 1.13 which was last touched on the US Presidential election back in November – note the spike at the leftmost of the chart above. Should Euro manage to overcome the resistance there as more positive data come out for the Eurozone economy, it may climb to 1.15 and touch the downward trendline in the monthly chart below.
If it fails though and begins trending south, eventually it may go as low as 1.05 before 2018. But first 1.08 will prove quite a challenge for any downtrend developing. Keep an eye for a new high or a lower low than 1.11, as EURUSD may start consolidating the following days.