"The Pound has once again benefitted as the the Euro’s uncertainties look set to continue as tensions rise in Spain over the Catalonia referendum" - Pareh Davdra, CEO RationalFX.The Euro remains near recent lows mid-week after reports of Spanish police being deployed in Catalonia as part of an attempt to shut down the region’s independence referendum planned for Sunday, 01 October.

News headlines concerning the event point to an increasingly volatile situation that is significant for the Euro, which has become attuned to political risks once more in the wake of the German federal election.

Pound Sterling Live reported Tuesday how thus far, the risks associated with the Catalonia referendum have been low-key with little angst seen on currency markets, but that commentators are increasingly referring to the matter as one of significance.

We noted how once commentator suggests a potential 5% loss in value for the Euro over the matter.

Sunday’s independence referendum in Catalonia follows the federal elections in Germany which handed Chancellor Merkel a weakened hand owing to the rise in popularity of fringe parties.

And the Catalonia referendum will come as campaigning for Italy’s May 2018 election commences. Italy is widely seen by economists as a key medium-term risk for the Eurozone and its currency.

“The bigger risk to the Euro is unlikely to come from Germany, but instead could come from Spain where the Catalan region is planning to hold an illegal referendum on independence on 1st October,” says City Index research director Kathleen Brooks, in the aftermath of last weekend’s German election.

The Pound-to-Euro exchange rate has advanced as political tensions in Europe flare up once more with a fresh multi-week high being achoeved at 1.1431 mid-week.

"The Pound has once again benefitted from political uncertainty elsewhere, as the Dollar is weighed down by concerns over North Korea and the Euro’s uncertainties look set to continue as tensions rise in Spain over the Catalonia referendum," says Pareh Davdra, CEO at foreign exchange brokers RationalFX.

The Euro-to-Dollar exchange rate has meanwhile hit its lowest point since mid-August at 1.1730.

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Tensions Grow

Local officials also told international media that there will now not be an effective referendum due to the clampdown by authorities and plans for a heavy police presence at polling stations Sunday.

Spanish forces leaving for Cuba (1895), for Western Sahara (1975) and for #Catalonia (2017). Same goal: crush independentists. pic.twitter.com/BPTHZsnmB6

— Jaume Clotet (@jaumeclotet) September 26, 2017One Catalonia representative (above) has likened the clampdown to events that took place in imperial times and, latterly, Spain's days of fascism.

But Spanish Prime Minister Mariono Rajoy won support from US President Donald Trump Tuesday for his bid to prevent the referendum.

In a joint press conference, Trump told reporters; “I think Spain is a great country, and it should remain united.”

It was an honor to welcome President @MarianoraJoy of Spain. Thank you for standing w/ us in our efforts to isolate the brutal #NoKo regime. pic.twitter.com/43U4T34JgF

— Donald J. Trump (@realDonaldTrump) September 26, 2017A reporter asks @POTUS: Do you support what the Spanish government is doing regarding Catalonia? pic.twitter.com/ZZRJj2z7YE

— CBS Evening News (@CBSEveningNews) September 26, 2017Sunday’s referendum, which follows a decades long separatist push by the wealthy Catalonia region, has been deemed illegal by Spain’s constitutional court.

Catalonia held another independence vote back in 2014 that was hampered by opposition from Madrid and low turnout, but showed strong support for independence among those voting.

Crowds across Spain chant #AporEllos ("Go get 'em") to police officers leaving for #Catalonia in the run-up to the October 1 referendum pic.twitter.com/pO0tUM720R

— Catalan News (@catalannews) September 26, 2017“If the outcome is a 'yes' vote and a unilateral declaration of independence follows, the destabilising effect on the economies of Catalonia and Spain could be very large,” says Oliver Jones, an economist at Capital Economics.

The weekend’s independence referendum in Catalonia comes as Italy’s political heavyweights take to the campaign trail ahead of a May 2018 election that forms the next big political risk event for the Eurozone.

Italy’s election could present a far greater threat to the post-crisis calm in Eurozone financial markets than Sunday’s German election, or the referendum in Catalonia, given the prospect for an anti-Euro party to emerge at the head of coalition government or as a sizeable opposition force in both houses of the Italian legislature.

“The return of the ‘populist voter’ in a European election is a reminder that political risks haven't completely abated for the euro – especially with the spectre of the possibly more contentious Italian elections looming in early 2018,” says Lee Hardman, an analyst at MUFG.

The Pound-to-Euro rate was quoted 0.12% lower, at 1.1390, during early trading in London Wednesday. The Euro-to-Dollar rate was down 0.08% at 1.1773.

“This could well be a concern for medium-term real money investors (eg, reserve managers), while any waning EZ recovery sentiment could see a pause in the cyclical EUR upswing,” says Hardman.