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Politics and forex: fears for Europe?

So far this year, a notable number of elections in Europe – in particular the local and European elections throughout the EU – have seen resulted in remarkable swings towards the nationalist right. Inside the eurozone, France and Greece have moved towards separatism, with similar results outside of it from England and Denmark.

In the Scottish Independence referendum, Scotland will vote on whether to remain part of the United Kingdom or whether to secede as per the wishes of the ruling government, the Scottish Nationalist Party. That election will be momentous for anyone with a stake in the future of the pound, as well as the political future of the UK.

By Patrick Foot, financial markets writer for IG. Find out more about IG’s forex trading: https://www.ig.com/uk/forex-trading

Should the Scottish attempt to take the euro instead of the pound, we will see an effect on that currency as well. But as the pound is their preferred option and any adoption of the euro would come well after independence is decided, we will have to assume that any forex impact will be on the pound for the time being.

The European Union has had to welcome an influx of aggressors into its parliament after the elections in May, a position which will not change until the next elections in 2019. Perhaps more significantly, the voting public in several key countries have made it clear that nationalist sovereignty is more important to them then the economic and political benefit of European integration. In Scotland, the referendum is still hard to predict, though IG’s grey market on the topic suggests a majority vote for NO.

So what impact is the increased nationalist sentiment and uncertainty it brings having on currency pairs across the eurozone and UK?

Europe

The performance of EUR/USD in the run up to and aftermath from May’s elections was fairly underwhelming: the euro began the month at 1.3868 and ended it at 1.3634, a drop of 234 pips. That’s the biggest drop seen so far this year, and the euro has shown few signs of improving against the dollar since.

Looking at the performance of a single currency pair over an entire month raises the possibility of other factors influencing movements, in particular the strengthening of the dollar as the United States’ economy improves. But drilling down further only highlights the impact of European uncertainty; during the week of the elections (which began on the 22nd May) the euro experienced an accelerated fall, from 7.5 pips per day up to 13.

The euro also saw a drop in worth for May when compared to currencies from Japan, Switzerland, Great Britain, Canada, South Africa and Singapore. This election was not fought on the issue of the single currency, so nationalist sentiment is most likely the cause for the euro’s plight.

Great Britain

As well as the upcoming referendum for Scotland, Great Britain saw a swing towards nationalism in May when the European and local elections resulted in a decisive victory for the UK Independence Party.

Moves away from the economic power of the European Union appear to be unpopular in the markets, as the week in which the elections took place saw the pound drop across the majority of major and minor currency pairs. The pound dropped 26 pips per day against the dollar: over six times faster than for the month as a whole. It even dropped against the euro; as it appears that the clear and focussed separatist movement in Britain has agitated the markets more than the dissolved result in Europe.

It is harder to ascertain the impact of Scottish nationalism as the election is still months away and the road to the referendum has been a long one. Major downturns in GBP do seem to occur as key announcements are made, though, with GBP/USD dropping 66 pips in the week after the referendum was set, and 80 pips after the question was finalised. GBP’s performance against the EUR was also poor after both announcements, dropping 122 and 140 pips respectively.

These movements occurred in the face of a broadly positive period for the pound, which is higher at the time of writing against both the dollar and the euro than it was when the referendum was confirmed in October 2012. So it appears that any effect that events in Scotland are having on the pound are short term, for the time being at least.

In fact, it is worth noting that this has been an unusually quiet period for currency movements, for various reasons. Whilst moves towards political nationalism have unsettled some, they are clearly not the spark that the markets have been waiting for. That is to be expected, as peaceful political movements tend to have a slow burning impact. As nationalism begins to have a real political bearing in Europe, however, that situation may well change.

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