How Do the EU Election Results Affect the Currency Market?

06/09/2009 10:24 am EST

Focus: FOREX

Boris Schlossberg

Managing Director of FX Strategy and Co-Founder of BKForex LLC, BK Asset Management

After four days of voting, the European elections have concluded with center right parties securing 267 votes in the 736-member EU Parliament, while socialists gained 159 votes, and liberal democrats brought up the rear with 81 seats. Overall, the elections were good news for Chancellor Merkel of Germany, President Sarkozy of France, and Prime Minister Berlusconi of Italy, and terrible news for UK PM Gordon Brown, whose government appears to be teetering on the edge of collapse.

The Labor party was able to garner only 14% of the vote—its worst showing in nationwide polling since 1918. To add insult to injury, the far-right British National Party was able to win two seats in the European Parliament, which many analysts believe was the direct result of disaffection with the Labor party policies.

Mr. Brown now faces a crucial meeting with a Labor Parliamentary caucus. If the dissenters manage to muster enough votes, Mr. Brown could be ousted as Labor’s leader, precipitating an early election in the UK.

The political turmoil continues to weigh on the pound with the currency slipping further below the 1.6000 level to hit a low of 1.5857 in early-morning London trade. EUR/GBP, meanwhile, continued to recover from its recent lows with the pair trading near the 8800 handle.

After staging a massive turnaround on Thursday due to the political turmoil in UK, EUR/GBP remains well bid, and should PM Brown be forced to resign this week, it could move higher and challenge the resistance at the 9000 level. However, with much of the news already baked into the price, any announcement of a Brown resignation could in fact trigger the classic “Buy the rumor, sell the news trade” with cable staging a relief rally instead. As we noted last week, while the political uncertainly of Mr. Brown’s situation hangs over sterling like a black cloud, the final resolution of the saga could prove positive to the currency, especially if FX traders begin to anticipate a win by the market-friendly conservatives.

By Boris Schlossberg of GFTForex.com

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