Elections in Germany and Italy this Sunday might stir pound to life if the results aren’t Euro friendly.
Following years of Euro elections and the influence of their outcome on the Pound-Euro exchange rates, Paul Meggyesi, vice president of global currency and commodity strategy at J.P. Morgan, says Italy’s and Germany’s votes could potentially tip the balance in favour of the Pound.
Italians are going to the elections on Sunday, March 4 and should voters deliver a “market unfriendly” outcome by, for example, favouring the Five Star Movement party, the Euro could decline while Sterling could be a winner.
The Five Star Movement is Italy’s largest political party and a growing anti-establishment force. If they gain the majority on Sunday, they will likely start renegotiating European rules on budget deficits and austerity. The party has also floated the idea of a referendum on Italy’s continued use of the Euro in the event that the negotiation fails.
The same Sunday, March 4, poses another risk for the Euro: members of the SPD party in Germany will be voting to decide whether they want to join a Euro-friendly grand coalition with Angela Merkel’s CDU party. Any failure by Merkel to secure a deal with the SDP could put further European integration on hold.
By themselves these two events don’t constitute any real threat to the EU or its economic stability. However, the outcomes can cause some stir in the currency market, as French elections did in 2017 when ahead of the election the Pound-to-Euro exchange rate rose towards 1.20 and swiftly retreated following the pro-European outcome delivered by the Macron victory.
“The EUR cannot entirely avoid political risks in Germany and Italy. While not a game-changer for the medium-term uptrend, the lingering event risks offer a great reason to take profit on a well-populated trade,” says a strategy note from global investment bank TD Securities.
Adverse outcomes to both events will mean uncertainty, and currencies hate uncertainty. And although traditionally safe heavens in such cases have been Yen and Dollar, Pound has a chance according to PoundSterlingLive.