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How EU Election Result will Impact the Pound-to-Euro Exchange Rate: UK, Italy and France are the Focus

 Euro exchange rates

Image © European Union 2018 - European Parliament, Reproduced Under CC Licensing.

The European Union elections are underway in what promises to be one of the most important vote for the region in years; and the Euro exchange rate complex could well take note of any upsets.

For Euro exchange rates, what happens in the UK, Italy and France will be key and we remain wary of moves in the GBP/EUR exchange rate cross over coming days as the results of the vote in these three key states becomes known.

In the UK, the success of the Brexit Party will be important as it could speed up the departure of Prime Minister Theresa May.

"A strong showing for the Brexit Party would be read as voter support for a harder form of Brexit, and should also intensify market worries that such an outcome would be again back on the table and further cloud the outlook for the GBP," says Jan von Gerich, an analyst at Nordea Markets.

Gerich argues rather than the support for individual parties, it will be the total support for parties supporting a certain Brexit outcome that will be in focus.

The British Pound has now suffered 13 successive days of losses against the Euro in a sign that markets are growing increasingly nervous of a 'no deal' Brexit being the eventual outcome on October 31, the day the UK is officially scheduled to leave the EU.

The UK's appetite for Brexit could become apparent in the outcome of today's vote.

The scale of the vote for the Brexit Party could indicate the pro-Brexit sentiment in the country while also being seen as a proxy against the current government's handling of Brexit.

A big defeat of the Conservatives and a big win for the Brexit Party could see May step down.

We note in this article published this morning that the removal of Prime Minister May could actually prompt a rally in the value of Sterling simply because a veil of uncertainty over the outlook is removed.

Currencies despise uncertainty and their natural reaction function to its removal is to go higher.

Therefore, don't discount a bounce in Sterling should May step down.

Yet, the overall trend in Sterling remains lower and with a summer of jostling amongst Conservative politicians for the top job we would expect the potential for further declines.

"The temptation to support a leader who has expressed a willingness to consider a no-deal Brexit could be strengthened by the strong public support for Nigel Farage's new Brexit party," says Mark Haefele, Global Chief Investment Officer GWM at UBS.

"Investors should not be complacent about the threat of a no-deal exit," says Haefele.

UBS believe a 'no deal' would take the Pound as low as 1.15 vs. the Dollar and 1.03 vs the Euro.

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Salvini

Liga's Salvini, file image © European Union - European Parliament.

In Italy, the Euro's reaction to the success of Matteo Salvini's Liga party is key.

Liga is one half of the Italian governing coalition and has actually seen its popularity rise in response to Salvini's confrontational stance against the European Union.

Coalition partners the 5-Star Movement have meanwhile been punished in the polls for being the 'responsible' partner.

popularity of Liga

"If the Lega does well in the EU vote, Salvini may not be able to resist the appeal of breaking the current government and trying to push Italy to early elections, where he could aim for the Prime Ministerial post with his more traditional allies, including Silvio Berlusconi’s Forza Italia," says Gerich.

"The prospect of Prime Minister Salvini, with his known EU scepticism and open defiance of the EU rules, would scare financial markets, which would most likely lead to renewed volatility in Italian government bond markets, and probably hurt economic confidence on the Euro-area level as well," says Gerich.

Macron

French President Emmanuel Macron, file image © European Union.

In France, the future of Emmanuel Macron's project to create a more integrated European Union is at stake.

Macron has made it his project to bring Europe closer, reckoning this would make it a more effective vehicle to delivering wealth and stability to its population.

However, Macron has faced incredible domestic resistance to his own domestic reform agenda with unrest from the so-called 'Yellow Vest' movement translating into a broader discontent with the President's running of the country.

According to Gerich, the outcome of the European vote will also be important for the outlook of his domestic reform programme.

Macron’s La République En Marche! (LREM) is polling close to Marine Le Pen’s Rassemblement National (RN), and Gerich reckons a victory for Macron would give his agenda a boost.

A boost for Macron would be a boost for the Euro in our view.

"Macron’s reforms have brought hope to the Euro area as a whole, showing that there is an alternative to the rising wave of populism offering simple but flawed solutions. In other words, Macron’s reforms matter not only for the French outlook but for the Euro area as a whole," says Gerich.

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