The Euro has rallied by 0.6% against the Pound today and could extend gains in the months ahead depending on the outcome of the Dutch general election in mid-March.
While not considered as important as the French and German elections later this year, the Dutch vote in March is nonetheless being seen as a preview of how sentiment across the EU may be shifting.
The election is expected to be a chaotic one, with the incumbent People’s Party for Freedom and Democracy (VVD) going up against the radical Party for Freedom (PVV).
Broadly speaking, the VVD are more in favour of European unity as well as the Euro and the European Union, while PVV politicians are more aligned to Euroscepticism and taking tough stances on migrants.
The two parties are at bitterly different ideological standpoints, which makes the chances of a coalition slim to none; this has led to speculation about how the new government could be a pick and mix of different parties to form a solid majority.
If the more stability-linked VVD retain power in the election, then the Euro is expected to appreciate (or at the very least hold steady). If the PVV take charge after the March 15th vote, then the EUR GBP exchange rate could drop sharply on concerns of increasing separation within the EU and Eurozone.
The latest UK economic news was Services and Composite PMIs for February, which showed a larger-than-expected services sector drop and weakened Sterling demand considerably.
For the Pound to advance against the Euro in future, the Bank of England (BoE) could play a significant role.
The BoE previously cut UK interest rates in August 2016 after the EU Referendum and has been alternately criticised and praised for its caution.
Since then, the Pound has plummeted and inflation has been rising, topping 1.8% on the year in January.
The BoE’s inflation target is 2%, so if the rate of inflation repeatedly exceeds 2% in the coming months then the BoE may find itself under increasing pressure to raise the UK interest rate.
A rate hike would benefit the Pound, potentially triggering an extensive rally against the Euro in the process.
On the other hand, if inflation exceeds 2% and the BoE holds off on raising interest rates, then the Pound could make dramatic losses whenever the BoE holds its meetings.
Recent Interbank EUR GBP Exchange Rates
At the time of writing, the Euro Pound (EUR GBP) exchange rate was trading at 0.85 and the Pound Euro (GBP EUR) exchange rate was trading at 1.16.
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