The EUR GBP exchange rate extended its losses this morning as recent polls in France showed that Marine Le Pen’s far-right National Front party is gaining support in the country ahead of presidential elections later this year.
A victory for the National Front is seen as a major threat to the stability of the Eurozone as Le Pen promises to hold a referendum on France’s European Union membership if she is elected in May.
Le Pen’s focus on voters’ concerns over security following a number of deadly terrorist attacks in recent years has seen support for her party swell. Her popularity has also been helped by the focus on her rival independent front-runner Emmanuel Macron.
As Bruno Jeanbart, director of OpinionWay explains;
‘It’s all about security, Le Pen is benefiting from the fact that they’re all busy either bickering or unable to disentangle themselves from their many controversies.‘
While Le Pen is still trailing behind Macron, with OpinionWay polls suggesting that she will lose to him 58% to 42% in the second round, the gap has rapidly closed over the past couple of weeks, weakening EUR GBP.
France’s position as the second largest economy in the Eurozone could leave the single currency in dire straits if Le Pen is successful in the elections and is able to follow through with her plans to leave the EU.
A similar story is also unfolding in the Netherlands with the populist, Eurosceptic Leader of the Party for Freedom Geert Wilders leading opinion polls ahead of the Dutch elections next month.
While Wilders key campaign policies focus on immigration, he has also been vocal about his desire to lead the Netherlands out of the EU and a victory for him in March would likely boost the odds for Le Pen in France.
Worries over political stability in Europe have also eclipsed an uptick in recent PMI data from the Eurozone.
Both France and Germany reported a notable rise in activity in their Services sectors in February, with Markit reporting they rose from 54.1 to 56.7 and 53.4 to 54.4 respectively.
The jump, aided by a rise in German Manufacturing, led the Eurozone Composite PMI to soar from 54.4 to 56.0 over the same period, reaching a six-year high.
Meanwhile, the Pound was strengthened by the release of the UK’s latest Public Sector Borrowing data, with figures showing that Britain enjoyed its highest January surplus in 17 years.
The report shows that borrowing rocketed from a deficit of £4.24bn to a surplus of £9.82bn at the start of the year, with the decision by the ONS to change the method of measurement meaning that a previous forecast of £14.4bn is now irrelevant.
The shock rise caused some analysts to re-adjust their expectations for government borrowing this year as they predict that the UK will now borrow less than the £68bn initially expected. As Scott Bowman of Capital Economics explained;
‘Looking through some of the monthly volatility, receipts growth has been fairly steady since June – adding to the evidence that the economy has held up well following the vote to leave the EU’.
Tomorrow’s UK GDP report could allow Sterling to solidify gains if growth remains within expectations, although a drop could spook investors who still fear Brexit will have a negative impact on the British economy.
Meanwhile EUR GBP may slide further on Wednesday with the release of Germany’s latest Business Confidence data as investors expect concerns over the rise of populism in Europe to weaken business sentiment.
Current Interbank Exchange Rates
At the time of writing the EUR GBP exchange rate was trending around 0.84 and the GBP EUR exchange rate was trending around 1.17.