French Vote: Best and Worst Outcome for Pound to Euro Exchange Rate Buyers

June 30, 2024 - Written by John Cameron

STORY LINK French Vote: Best and Worst Outcome for Pound to Euro Exchange Rate Buyers

Credit Agricole expects the Pound to Euro (GBP/EUR) exchange rate to strengthen to 1.19 at the end of 2024. It does, however, see scope for gains to near 1.22 if there is a left-wing majority victory in the French parliamentary elections.

Danske Bank still expects a GBP/EUR retreat to 1.15 on a 12-month view.

GBP/EUR was held in relatively tight ranges during the week, although there were net losses to test the 1.1800 level.

The immediate outlook for GBP/EUR is likely to be determined by political factors.

The UK General Election will be held on July 4th.

Opinion polls continue to suggest that the Labour Party will win a substantial majority, although there is a wide range of outcomes given the uncertainties over tactical voting and the extent of support for smaller parties.

There has been little impact so far from the campaign.

MUFG commented; “Market participants remain comfortable with the prospect of a big Labour majority which could bring more stability to UK politics and open up the potential for relations between the EU and UK to improve in the coming years.”

Assuming Labour does win with a large majority, attention will focus quickly on economic policy.

Monex Europe head of FX research Simon Harvey expects short-term Pound support on the assumption of fiscal stability and pro-growth policies.

Nevertheless, he added; “But if UK economic growth improves over time, there is still that risk that Labour swings too far to the left, so people do want to see how this washes out long term and investment managers might not like the look of this over five years".

Danske Bank added; “we do not expect this to move markets, given the modest size fiscal headroom facing the next government, as well as lessons learned from the autumn 2022.”

After the election, market attention will return quickly to monetary policy and the potential for a cut in interest rates.

According to HSBC; “We still think the MPC will cut the Bank Rate by 25bp in August, as some MPC members that voted for hold in June saw the decision as ‘finely balanced’. But it is a very close call.”

It added; “Assuming they do cut in August, we then see the Bank gradually cutting policy rates by 25bp per quarter, taking the Bank Rate to 3.75% by end-2025.”

The UK vote is sandwiched between two rounds of the French parliamentary election and the outcome will have an important impact.

Heading into the June 30th first round, opinion polls suggest that President Macron’s centrist party is trailing third behind the National Rally (RN) and left-wing alliance (NFP).

There will then be run-offs between the top two candidates on July 7th.

A majority for the RN or NFP would have important implications with their policy platform potentially clashing with the EU.

ING commented: “It is therefore highly likely that in the event of a left-wing or far-right majority, the future government will have to choose between the risk of provoking an economic, financial and institutional crisis or the heavily watered-down implementation of their initial programme. The examples of Greece in the early 2010s, and more recently of Italy, tend to show that the second option will eventually prevail.”

According to Wells Fargo; “Importantly, should National Rally fall short of an outright majority, it could limit the extent to which they are able to pursue populist policies such as lower taxes, higher spending and a wider deficit. Far-right politicians no longer seek to remove France from the euro, which should limit the worst-case impact on the currency.”

Nevertheless, it added; “That said, while French election risks are to some extent already priced into the euro, should National Rally be able for secure some form of government it would likely interrupt France's fiscal consolidation efforts and make France less inclined to contribute to, and become engaged in, European Union projects. All of these are factors that could, at the margin, slow the pace of the euro's recovery and appreciation prospects over the medium term.”

According to Danske Bank; “Recent polls have pointed to the most likely scenario being a hung parliament with no one-party-majority. In this scenario, the worst fears in markets of vast fiscal spending increases should diminish, as any coming government would need to compromise to pass any bill.”

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TAGS: Pound Euro Forecasts