The Pound weakened against the Euro on Monday following the anticipated victory of Germany’s conservatives in the national election.
The single currency initially climbed to its highest level in over two weeks against the Pound but gave back some of those gains, ending up 0.1% higher at 82.91 pence per Euro.
Friedrich Merz is poised to become Germany’s next chancellor after his party won Sunday’s election. However, he faces intricate and prolonged coalition talks, following a historic surge by the far-right Alternative for Germany (AfD), which claimed second place in a divided vote.
“The more positive psychological effect of the change of political leadership could be quickly offset and dampened by complicated coalition negotiations,” according to Carsten Brzeski, global head of macro at ING.
Markets are optimistic about potential reforms to revive Germany’s sluggish economy, but analysts noted on Monday that the path to reform may not be smooth, Reuters reports.
Monday’s Euro movement helped offset some of its losses against Sterling this month, with the Euro now down 0.8% in February. Meanwhile, interest rate expectations continue to differ between Britain and the eurozone.
Traders anticipate that the Bank of England will reduce rates by an additional 54 basis points (bps) this year, but they believe these cuts will be gradual due to persistent UK inflation.
Meanwhile, markets expect the European Central Bank to ease rates further by approximately 80 bps.
Sterling remained largely unchanged against the Dollar at $1.2633 at the time of writing, after reaching a two-month high of $1.2690 earlier in the session.
Investors will closely watch comments this week from various Bank of England officials.
“This week, the UK data calendar is empty, so all the domestic focus will be on BoE speakers,” said Francesco Pesole, currency strategist at ING.
“We’ll hear from two doves today – Swati Dhingra and Dave Ramsden – as well as from hawkish-leaning Clare Lombardelli. Tomorrow, we’ll hear from Chief Economist Huw Pill.”