Pound to Euro Rate Corrects

June 17, 2024 - Written by John Cameron

STORY LINK Pound to Euro Rate Corrects

The Pound to Euro exchange rate (GBP/EUR) surged to 22-month highs just above 1.1900 last week before a correction to 1.1835 on Monday.

Political and economic risks will be important for the Pound this week with MUFG seeing scope for further Pound gains and a potential move to at least 1.1975

The Euro has continued to be hampered by political developments ahead of French parliamentary elections with the first round on June 30th and second round a week later.

ING noted that latest opinion polls point to a lead for Le Pen’s National Rally.

According to the bank; “It is hard to see investors' fears of French election risk being assuaged this week, although plenty of European Central Bank source stories suggest that those in Frankfurt are not panicking.”

Chris Weston, head of research at Pepperstone also pointed to political risks; "With traders wanting certainty, this may not come until after the second-round vote (July 7), so the prospect of further downside in French and EU markets is real."

MUFG added; “Heightened fiscal concerns is one area that is attracting more market attention and has already resulted in the yield spread between French and German 10-year government bonds widening sharply to the highest level since in early 2017.”

Rabobank expects further volatility; “The market is in for a choppy lead into summer (should it ever arrive). The seat belt sign is on. Prepare to ride this out.”

ING also pointed to the wider European outlook. It noted; “In focus today will be tonight's meeting of EU leaders and who gets the top jobs in Brussels. It is thought that Ursula von der Leyen will secure a second term as president of the European Commission after her EPP party won the largest number of EU parliamentary seats in recent elections.”

A vote for stability would provide an element of Euro support.

The UK election has not had a notable impact on markets.

MUFG noted; In contrast, the upcoming general election in the UK which is scheduled to take place on 4th July has had limited impact on GBP performance so far. Market participants remain comfortable with the prospect of the Labour party winning a strong majority in parliament.

Opinion polls do suggest that Labour will win very comfortably while the Conservative vote is being squeezed which could lead to massive losses and a huge Labour majority.

There could be talk of more radical Labour policies if there is a lack of opposition.

ING noted some warnings over a massive Labour win; “We're not sure if the Tories are trying to link the risk to events in Mexico – the Morena party's massive win and the threat of constitutional reform upending local asset markets?”

MUFG is still positive on the Pound; “a strong Labour majority could even be viewed as supportive for the GBP by welcoming in a period of greater political stability in the UK and opening the door for closer relations with the EU.”

ING still expects economic developments will dominate; “we think it will be the Bank of England story which drives sterling this week. Wednesday/Thursday this week should deliver a double-header of negative news for the pound. Here, UK May services CPI should drop sharply on Wednesday and be followed up a day later with tweaks to the BoE policy statement which hint at an August rate cut.

MUFG considers the most likely outcome is for further Pound gains. It commented; “The release of the UK CPI report for May would have to be much weaker than expected and/or the BoE send a stronger signal that they are planning to cut rates in August to trigger a reversal of the current trend.”

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TAGS: Pound Euro Forecasts