As the UK election results dramatically back-fired on Theresa May, the Pound is now likely to face an even rougher ride in the months ahead as Brexit negotiations gain momentum. An election which was intended to deliver strength and stability seems to have had the opposite outcome.
Meanwhile, our continental colleagues are, at least for now, breathing a sigh of relief that political events have not had a similar impact on the value of the Euro.
It could have so easily have been ‘un catastrophe’ for the single currency had the anti-EU Front National leader Marie Le Pen come out on top in the final run-off of the French presidential elections in May. Her centrist and pro-EU rival, Emmanuel Macron, secured a substantial victory in the head-to-head vote, as predicted. But in a year which has delivered both Brexit and President Trump, who could have been absolutely certain that Macron would prevail?
Although the outcome of the French elections did not have an overall positive impact on European markets – after a brief rally in which it hit a six-month high against the US Dollar, the Euro fell back in value, France’s CAC 40 index closed down 0.9 per cent and Germany’s DAX dropped 0.2 per cent – the potential for much greater damage from a Le Pen victory was at least averted.
Here in the UK, we are well aware of what an unanticipated political event can do in terms of its impact on currency values. Following last year’s vote to leave the European Union, businesses had to quickly come to terms with the fact that Sterling sank by 20 per cent against other major currencies. In the immediate aftermath of June’s general election, it fell even further with potential for it to plummet again as the UK must now negotiate its departure from the EU with a minority government in place.
Even prior to the UK general election, leading strategists, including Deutsche Bank’s George Saravelos, had already suggested the Pound may endure a lot more pain before making any recovery. The outlook now is even worse.
While both French and Dutch voters have so far delivered relatively secure election results for the markets, potential threats hang over the future value of the Euro as an anti-EU mood continues to grow in some parts of Europe. While this isn’t anywhere near the same scale as we experienced in the UK in the lead up to the 2016 EU referendum, the year ahead could be one of the most significant ones in determining the longer term fate of the single currency.
Later this year when Germans go to the polls, we are likely to get a further, and very important, perspective of what voters in the biggest and most influential member state think of the EU.
In this election, which takes place on September 24, Chancellor Angela Merkel will be running for her fourth term at a time when she has seen a significant fall in her popularity. The refugee crisis in 2015, which saw Germany welcome 1.1 million people from countries like Iraq, Syria and Afghanistan, has been followed by some high profile terror incidents in the country, which have adversely affected Merkel in the polls.
The forthcoming contest now looks set to be a fight between Merkel’s centre-right Christian Democratic Union (CDU) and Martin Schulz of the centre-left Social Democrat Party (SDP). Following the recent and unexpected regional election win for the CDU in North Rhine-Westphalia, an area which traditionally votes SDP, Merkel’s forthcoming demise might well be over-exaggerated. While the far-right and anti-European Alternative für Deutschland party saw its vote squeezed in that election, it’s difficult to predict at this stage whether these more radical parties might still gain further traction during the national election campaign; all of which could impact the stability of the single currency.
The potential for continuing currency fluctuations is, of course both a threat and an opportunity for importing and exporting businesses operating within these markets. What is vital in this climate of uncertainty is that companies implement a robust and comprehensive risk-management strategy to minimise their exposure to foreign currency movements which often result from political uncertainty.
Any business with foreign currency requirements, especially those which trade across Europe, must conduct their transfers strategically to manage their exposure if they want to secure profitability. The starting point for developing such a strategy is to clearly understand what their level of exposure is in terms of currency movement, and from there they can set out an appropriate budget rate and create a suitable hedging plan. Using a combination of forward contracts, spot deals and orders according to such a strategy can provide certainty and protection, shielding their bottom line and maximising the funds they receive.
The unfolding scenario in the UK and across the EU presents a challenge to any businesses transacting in Pounds and Euros. Brexit negotiations led by a weakened minority government will make the plight of Sterling even more unpredictable than it had been, while the German elections later in the year are also likely to have an impact on currency markets, one way or another. Let’s also not forget the very real potential for the US Dollar to fluctuate significantly over the course of Donald Trump’s presidency.
Business will have little impact on the outcome of these events, but companies can prepare so they are able to mitigate the potential financial affect that the outcomes will have on their bottom line.
Greg Smith, Head of Trading, Global Reach Partners