June 10, 2024 – Written by John Cameron

STORY LINK Far-Right Election Gains See Pound to Euro Exchange Rate at 22-Month Best

The Pound to Euro (GBP/EUR) exchange rate pushed through key resistance at 1.1765 on Friday as the Euro dipped more than the Pound following the US jobs data.

GBP/EUR gains accelerated in Asia on Monday after the latest European elections and French President Macron’s election gamble.

Rabobank still considers that the Pound can make further headway; “In our view, GBP’s gentle recovery is likely to remain a theme through the remainder of the year and into 2025. We continue to expect EUR/GBP to creep towards the 0.84 level this year (1.1905 for GBP/EUR) and we remain of the view that any rallies towards the 0.86 area are selling opportunities. (GBP/EUR buying at 1.1630).

ING considers there could be further near-term GBP/EUR gains, but added; “we think this sterling rally does not last and probably reverses next week when we hear from the Bank of England next Thursday – likely preparing the market for an August rate cut.”

Although overall results were mixed, far-right or Nationalist gains in Germany, France, and Italy hurt the Euro.

In this context, GBP/EUR jumped to near 1.1820 and the strongest reading since August 2022.

The election results overall were mixed with left-wing parties, for example, making headway across Scandinavia.

Within the parliament overall, the centre-right European People’s Party maintained control. In France, President Macron’s centrist alliance was defeated by Marine Le Pen’s far-right National Rally which secured around double the vote share of Macron’s group.

Following the result, Macron called early parliamentary elections in an attempt to re-assert authority.

ING noted; “This move is widely seen as a gamble either to question the French electorate on whether they really want a far-right government or to give the electorate three years’ experience with a far-right government ahead of the next French presidential election in 2027.”

It added; “While Marine Le Pen’s National Rally party has shifted away from the anti-euro manifesto it ran on in 2017, fears about shifting support for Ukraine stand to unnerve markets.”

According to Credit Agricole’s Valentin Marinov; “This could be seen as a blow to the nascent euro-positive sentiment that has started to dominate the FX markets in recent weeks. Any renewed widening of peripheral sovereign yield spreads to bunds could be seen as negative for the euro.”

According to Mansoor Mohi-Uddin, chief economist at Bank Of Singapore “The prospects of a far-right victory in France’s snap elections may keep the euro under pressure in the near term.”

Euro-Zone data releases will also continue to be watched closely.

Jan von Gerich, chief market analyst at Nordea “Obviously, the snap election is a new source of uncertainty, which should have some negative impact on economic and market confidence, at least in France.”

Market positioning will be an important element.

CFTC data recorded a further strong increase in long Sterling positions to over 43,000 in the latest week from 25,400 the previous week. This was the highest long position since early April, limiting scope for further buying.

There was also an increase in long Euro positions for close to three months, limiting the potential GBP/EUR impact.

UK economic developments will be in focus this week.

The labour-market data will be monitored closely on Tuesday with the data released at the European open.

Consensus forecasts are for the unemployment rate to hold at 4.3% with headline annual earnings growth holding at 5.7% with the underlying increase expected to remain at 6.0%.

Markets do not expect a Bank of England rate cut this month, but there will be important implications for the August meeting.

In particular, any slowdown in the rate of wages growth would spark stronger speculation surrounding an August cut.

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TAGS: Pound Euro Forecasts