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Political Pressures Mount on Euro and Pound

Political Pressures Mount on Euro and Pound

2017-10-06 08:38:00
Martin Essex, MSTA, Analyst
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Talking Points

- The Euro and the British Pound show little sign of recovery from their current weakness.

- Catalonia continues to defy the Spanish authorities as its politicians press for independence, while a leadership challenge to UK Prime Minister Theresa May is looking increasingly likely.

What Does the Fourth Quarter Hold for the Euro, Pound, Equities, Oil and Other Key Markets? Find out here

Both the Euro and the British Pound are arguably close to oversold territory yet a sustained rally in either looks unlikely near-term as the Euro suffers from Catalonia’s moves towards independence from Spain and a leadership challenge to UK Prime Minister Theresa May becomes increasingly probable.

In Spain, the country’s constitutional court has ordered a suspension of Monday’s session of the regional Catalan parliament, which was expected to discuss seceding from Spain. Catalonia’s leaders have already said they will consider going ahead anyway, raising the possibility of a constitutional crisis. The more excitable commentators have even raised the possibility of civil war, although the use of force has been specifically ruled out by Catalan leader Carles Puigdemont.

Against this backdrop, the Euro could well extend its recent falls despite the prospect of tighter Euro-Zone monetary policy early next year, a buoyant economy and a relative strength indicator on the daily EUR/USD chart which is close to oversold territory, with a reading now only just above 30.

Chart: EUR/USD Daily Timeframe (June 6 to October 6, 2017)

Political Pressures Mount on Euro and Pound

Chart by IG

In the UK, a leadership challenge to Prime Minister Theresa May came closer this week, with a former chairman of May’s Conservative Party, Grant Shapps, saying she should call a leadership election and that “the writing is on the wall” for her. Up to 30 members of parliament are seeking to topple her, Shapps said.

This suggests a substantial political risk for the Pound and could even prevent the Bank of England from increasing UK interest rates later this year – although market pricing still suggests the chances of a rate hike in November are around 75%. Like EUR/USD, GBP/USD is now approaching oversold territory but that seems unlikely to protect it near-term.

Chart: GBP/USD Daily Timeframe (June 6 to October 6, 2017)

Political Pressures Mount on Euro and Pound

Chart by IG

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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