Risks to Pound Sterling-Euro Exchange Rate are to the Downside says Analyst .

Economy Articles



Poll tracker

Above image courtesy of Britain Elects.

- Risks for Sterling are to the downside

- Pound Sterling in 0.50% fall at start of new month

- Sterling sensitive to odds of Cons. majority

The Pound-to-Euro exchange rate is trading at 1.1686 on Tuesday, December 03. and we are told by one analyst the balance of risks for Pound Sterling are balanced to the downside at this juncture.

The Pound came under pressure on Monday, with foreign exchange markets engaging in widespread selling of the currency amidst signs that odds of a Conservative majority being achieved at the December 12. General Election continue to decline.

The implied odds of a Conservative majority slipped below 65% on the Betfair Exchange, having been as high as 70% last week, amidst ongoing polling that confirmed a trend of increasing support for the opposition Labour Party in the polls.

GBP/EUR was quoted as high as 1.1765 when the odds were towards 70%, but the exchange rate has now fallen below the 1.17 level and is quoted at 1.1686 at the time of writing on Tuesday as the odds stand at 64%.

The Pound suffered a particularly poor start to the new week with a 0.5% decline as the exchange rate went lower "on the back of poor market sentiment and Sterling continues to be drifting," says Mikael Olai Milhøj, Senior Analyst with Danske Bank.

Further gains for Sterling "would need to be on the back of rising (expected) growth rates ahead, but data and continued political risk do not support such a case," adds Milhøj who says the risks for Sterling against the Euro are now to the downside.

Pound performance

We expect the Pound will remain highly sensitive to trends in the polls, and with just ten days to go until the election, Prime Minister Boris Johnson will become increasingly concerned that he a majority will be unachievable.

All polls point to a steady increase in vote share for Labour, while the Conservatives have seen their increase in vote share stall.

As such, Labour are closing the gap on the Conservatives, and a hung parliament - where no single party holds a majority - will become likely if the gap between the top two parties is smaller than 7%.

The New Statesmen's Britain Elects poll tracker - which combines all the polls to give an accurate overview - shows the Conservatives are on 42.4% while Labour are now on 31.8%.

Poll tracker

"If Conservatives win the general election, a clearer Brexit path will be paved," say Citibank in a briefing to clients of their Wealth Management unit. "If the general election result in hung parliament, nothing is resolved and Brexit remains in limbo."

For now economists at Citi are expecting Johnson's Conservative Party to cross the line with a majority, and this allows them to project a stronger Pound over coming months.

According to their current base-case scenario, the Pound-to-Euro exchange rate is forecast at 1.1913 in six-12 months, with the Pound-to-Dollar exchange rate forecast at 1.37.

However, the above forecasts could well change, depending on the outcome of the looming election.

According to Citi, a Labour majority "contains downside risk for GBP as Labour’s business unfriendly policies could see a sudden stop of capital into the UK."

A hung parliament meanwhile sends the UK "back to square one, nothing is resolved and Brexit remains in limbo," say Citibank. GBP/USD is forecast to slip back into a 1.22-24 range under such an outcome.

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