Euro rises against pound following German election results

On Monday, the British pound fell against the euro following the victory of Germany’s conservatives in the national election. The euro saw an initial surge to its highest level in over two weeks when compared to the pound, hitting 82.91 pence, an increase of 0.1%, Reuterd reported.

Friedrich Merz’s win positions him to become the next Chancellor of Germany, but he faces the challenge of engaging in complex coalition talks, especially after the far-right Alternative for Germany (AfD) party made significant gains.

The election results have prompted a mix of expectations from the markets, which are looking forward to potential reforms aimed at boosting the stagnant German economy. However, analysts expressed concerns on Monday that the path to implementing these reforms might be fraught with difficulties.

ING’s global head of macro, Carsten Brzeski, suggested that the optimism from the political shift could be tempered by the anticipated complicated coalition negotiations.

The euro’s movement on Monday provided some relief from its losses against the pound throughout the month, with the euro now down 0.8% in February. Interest rate expectations continue to differ significantly between Britain and the eurozone. Market traders anticipate the Bank of England will reduce rates by an additional 54 basis points (bps) this year, though they expect these cuts to be gradual due to persistent high inflation in the UK.

In contrast, the European Central Bank is expected to lower rates by around 80 bps. Meanwhile, the pound remained relatively stable against the dollar, trading at $1.2633 after reaching a two-month peak earlier in the session.

Investors are set to focus on upcoming statements from various Bank of England officials throughout the week. According to Francesco Pesole, a currency strategist at ING, with no significant UK data releases expected, the attention will turn to speeches from Bank of England representatives, including Swati Dhingra and Dave Ramsden today, as well as Clare Lombardelli, who is seen as more hawkish. Chief Economist Huw Pill is also scheduled to speak tomorrow.

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