Politics Dominate the Pound and Euro Exchange Rates

June 26, 2024 - Written by John Cameron

STORY LINK Politics Dominate the Pound and Euro Exchange Rates

The Pound to Euro exchange rate (GBP/EUR) advanced to highs just above 1.1860 on Tuesday before settling around 1.1845.

There are further doubts surrounding the Euro-Zone economic outlook, although political developments are tending to dominate at this stage with the countdown underway for two important elections in France and the UK.

Markets are continuing to debate the French political outlook ahead of the first round of parliamentary elections this weekend.

ING commented; “Markets appear to be making peace with the prospect of a National Rally victory and parliamentary gridlock, especially after Le Pen’s party attempted to ease market concerns on the fiscal side.”

It added; “We suspect investors remain way more sensitive to a better-than-expected result by the New Popular Front, which recently announced a EUR 25bn spending plan for 2024, followed by another 150bn by 2027, and is now perceived in markets as a greater threat from a fiscal stability perspective.”

At the European level, Danske noted source reports that Von der Leyen would be nominated for another term as Commission President with former Portuguese Prime Minister Costa as European Council President and Estonian Prime Minister Kallas as EU Foreign Policy Chief.

According to Danske; “If the trio officially secures the top jobs it will provide some calm to the political uncertainty in the EU that has risen especially on the back of the French election. A second term for VDL means continuity of EU politics while Kallas as high representative means continued support for Ukraine.”

As far as economics are concerned, the German GfK consumer confidence index retreated to -21.8 for June from -21.0 the previous month and compared with expectations of an improvement to -19.4.

Rolf Buerkl, consumer expert at the Nuremberg Institute for Market Decisions (NIM) which compiles the data commented; "The interruption of the recent upward trend in consumer sentiment shows that the road out of the sluggish consumption will be difficult and there can always be setbacks.

He added; "The slightly higher inflation rate in Germany in May is clearly causing more uncertainty among consumers again, which is also reflected in the increase in the willingness to save. For a sustained recovery in consumer sentiment, consumers need – in addition to the existing real income growth – planning security, which is particularly necessary for larger household purchases.”

ING added; “The latest batch of confidence indicators underlines the German economy’s struggle to gain more positive momentum. The return of optimism at the start of the year has given way to more realism.”

In comments on Tuesday, ECB council member Rehn stated that two further interest rate cuts were realistic this year.

According to ING; “While investors aren’t hugely hinging on ECB communication at the current juncture, Rehn’s words were a signal of tolerance towards inflation bumps, which is a euro negative.”

As far as the UK political situation is concerned, opinion polls continue to point to a very substantial Labour Party majority in the House of Commons.

Markets overall have considered that a convincing majority would underpin hopes for stability which would tend to be positive for the Pound.

According to Morningstar strategist Michael Field; "The strength you've seen in sterling lately is ultimately about (expected) stability,"

Liverpool university finance professor Costas Milas noted that the narrative will change if there is much smaller Labour victory or deadlock. He added; "A less confident political scenario will weaken sterling much more and make it much more volatile."

PGIM Fixed Income global strategist Guillermo Felices commented; "If Labour goes by the playbook and gives some sense of fiscal responsibility, that's a great support."

The Bank of England will release the Financial Stability Report on Thursday with a scheduled press conference by Governor Bailey.

Bailey will be constrained in his ability to comment during the election campaign, but warnings over financial risks would have some negative Pound impact.

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TAGS: Pound Euro Forecasts