Pound To Euro Advances To 1.1850 As EUR Currency Faces Political Concerns (2024)

The Euro has been on the defensive on Tuesday with the Pound to Euro (GBP/EUR) exchange rate strengthening to 1.1850 from 1.1815.

The Pound to Dollar (GBP/USD) exchange rate tested the 1.2700 level on Tuesday before a retreat to 1.2680 after the New York open as the US dollar secured net gains.

Traders considered that dollar selling had been overdone on Monday and this helped trigger a US recovery.

Markets also remained uneasy over the French political situation with the first round of parliamentary elections this weekend.

ING noted that the National Rally (RN) has issued soothing comments on fiscal policy, but it remains uneasy over the situation.

The bank commented; “there are still many possibly bearish chapters to play out here. One of those could be the Leftist Alliance doing a little better than expected in Sunday's elections. And while bond investors will welcome soothing words from the RN about France's budget trajectory, our team suspects it is too early for the party to be making significant concessions to its manifesto.”

It added; “We therefore expect that the euro will struggle to sustain a rally over the coming weeks.”

There has been no major change in the UK political narrative, with markets very confident of a substantial Labour majority, especially with opinion polls suggesting that the Reform Party is close to the Conservative Party which gives Labour a further advantage in many seats.

Credit Agricole noted that the Pound has continued to trade with a firm tone and added; “We believe that some of that resilience reflects FX investors’ hopes that the July elections would bring about political stability which, when coupled with growing real incomes and BoE easing, could foster recovery of the UK economy in the coming months.”

According to Bank of America (BoA); “We expect no major reset in EU- UK relationship but marginal improvement. Going into the election, a steady lead for Labour and relatively mainstream platforms for both parties imply low political uncertainty.”

BoA also considers the UK economic outlook; “Assuming the expected summer slowdown in wage growth and services inflation materializes, we anticipate the BoE to start cutting rates in August. Risks are to a later start to the cutting cycle and the near-term path is likely to reflect a cautious reduction of restriction.

The US consumer confidence index edged lower to 100.4 for June from a revised 101.3 the previous month, although this was slightly above consensus forecasts of 100.0.

There was a small net increase in the current conditions index which was offset by a retreat in the expectations index. This index has remained below the 80.0 level which traditionally signals a recession for the fifth successive month.

Average 12-month inflation expectations ticked down slightly from 5.4% to 5.3%.

Dana M. Peterson, Chief Economist at The Conference Board commented; "Confidence pulled back in June but remained within the same narrow range that's held throughout the past two years, as strength in current labor market views continued to outweigh concerns about the future. However, if material weaknesses in the labor market appear, Confidence could weaken as the year progresses."

Elsewhere, the Richmond Fed manufacturing index dipped to -10 from 0 the previous month, but there was greater upward pressure on prices.

CFTC data recorded a decline in long, non-commercial Pound positions to 47,600 contracts in the latest week from a 12-week high of 52,100 the previous week.

Elsewhere, there was a sharp decline in long Euro contracts to 8,000 in the week from over 43,000 the previous week as traders built up long US dollar positions.

Rabobank noted; “USD net long positions have increased for the sixth consecutive week, driven by a decrease in short positions.”

This shift in positioning will leave the dollar more vulnerable to selling pressure if there is evidence of economic deterioration and the Euro may be able to demonstrate some resilience.