Pound Election Update: Sterling Retreats to 10-Day Lows vs Euro

June 24, 2024 - Written by John Cameron

STORY LINK Pound Election Update: Sterling Retreats to 10-Day Lows vs Euro

The Pound to Euro (GBP/EUR) exchange rate has continued to drift lower with a decline to 10-day lows around 1.1815 amid stronger expectations that the Bank of England (BoE) will cut interest rates in August. The Pound could drift lower if market confidence in an August cut increases further.

Markets will remain sensitive to Euro-Zone political risks in the short term with the first round of the French parliamentary elections on June 30th.

There will be further concerns that a very strong performance for the National Rally (RN) will trigger further uncertainty over fiscal policy, especially with underlying pressures.

Earlier this week, for example, the European Commission warned France and Italy over their public finances by placing them in the Excessive Deficit Procedure.

According to MUFG; “Market participants are wary that plans to implement even a slow pace of tightening over say a seven year period could prove more difficult in implement after the upcoming elections. It has already resulted in the yield spread between 10-year French and German government bonds widening out to the highest levels since the euro-zone debt crisis back between 2011 and 2012.”

Euro-Zone economic conditions will also be an important element for the Euro.

The German IFO index declined to 88.6 for June from 89.3 and below consensus forecasts of 89.4.

The current conditions component was unchanged on the month while there was a retreat for the expectations index to 89.0 from a revised 90.3.

ING commented; “The latest PMI and Ifo readings have illustrated that the German economy is still struggling to gain more momentum. In fact, the turning of the inventory cycle we all have been hoping for since the start of the year is still not happening.”

It added; “Also, policy uncertainty, currently stemming from the government’s budget negotiations as well as the well-known structural weaknesses of the economy will limit the pace of any rebound. A strong rebound for this year remains highly unlikely.”

According to MUFG; “While we do not expect the negative political developments to derail the tentative economic recovery in the euro-zone, the release today of the softer PMI surveys for June will create some near-term doubts.”

ECB policy will also be a key element for the Euro.

According to Danske Bank; “we expect the market will have to wait until December for the next one. The economy is improving, and inflation continues to be fuelled by high wage pressure, which the ECB cannot yet conclusively determine is decreasing. Another rate cut in September is not ruled out, but it is no longer our main scenario.”

The UK calendar is relatively light this week while the Bank of England (BoE) will be silent ahead of the July 4th General Election.

The shift in UK and Euro-Zone rate expectations will continue to be important for the Pound.

MUFG commented; “The latest MPC minutes suggest policy makers could be willing to cut rates as soon as the next policy meeting in August. Inflation sentiment remained distinctly negative as policy makers flag caution on sticky services inflation. While labour market sentiment has worsened to levels not seen since May-2023 as policy makers highlight risks to a loosening labour market.”

According to Nordea, all major central banks could struggle to cut rates; “The problem is that central banks are very likely to be cautious about cutting interest rates when unemployment is historically low, wage growth remains at the highest level in several decades and inflation remains above the 2% target of most central banks.”

Standard Chartered is more confident over ECB rate cuts; “We expect the ECB to cut rates further by 50bps over the next six months, which should add downward pressure on the EUR.”

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TAGS: Pound Euro Forecasts