Euro Suffers Twin Setbacks, Pound Sterling Surges To 22-Month Highs (2024)

The Pound overall was relatively subdued on Monday ahead of Tuesday’s important UK Jobs data. The stronger than expected US jobs data on Friday triggered a cut in Euro long positions while the single currency was also undermined by Euro-Zone political concerns and EUR/USD posted sharp losses to 1-month lows below 1.0750.

In this global environment, the Pound to Euro (GBP/EUR) exchange rate jumped to 22-month highs around 1.1820 while the Pound to Dollar (GBP/USD) exchange rate dipped to 10-day lows below the 1.2700 level.

As far as the UK labour-market data is concerned, consensus forecasts are for all main metrics to be unchanged for the latest month with unemployment at 4.3% and headline average earnings holding at 5.7%.

Stronger than expected data would provide some support for the Pound while a slowdown in average earnings growth would spark additional speculation over an August Bank of England interest rate cut and potentially undermine support for the UK currency.

There were mixed results in the European elections with notable divergence between different countries.

According to Rabobank; “The European elections saw the centre hold its ground, albeit narrowly. The European People’s Party is poised to secure 184 seats in the new 720-seat Parliament, with the Socialists and the centrist Renew obtaining 139 and 80 seats respectively. This totals 403 seats for the grand coalition, a decrease from their current 417 seats in the old 705-seat Parliament.”

It added; “The overall left-right balance aligns with projections that indicated a lean but not a lurch to the right.”

Scotiabank commented; “Voting is a wake-up call for the mainstream parties domestically but direct and immediate implications for the EUR may be limited.”

The main focus was on strong gains for the right-wing French National Rally.

Reservations over the risk of political instability were amplified by President Macron’s decision to call snap parliamentary elections in response to a heavy defeat for his centrist alliance.

According to ING; “Whatever the political reasons, this decision will not ease the economic challenges facing the country.”

It notes that French GDP growth is likely to be held to 1.0% at most this year.

It added; “This weak growth continues to weigh on public finances, which are already in a very poor state. As a reminder, according to the latest figures from the European Commission, the deficit stood at -5.5% of GDP last year, and is set to narrow only slightly this year (-5.3%) and next (-5.0%).”

MUFG also notes the potential for the EU to announce tariffs on Chinese EV imports.

It added; “the risk of a tit-for-tat trade spat between Europe and China could further hurt investor sentiment towards the euro in the near-term.

The Euro-Zone Sentix investor confidence index improved to 0.3 for June from -3.6 the previous month which was stronger than consensus forecasts of -1.5 and the strongest reading since February 2022.

The statement was relatively cautious, especially as the current conditions component remained in negative territory. It noted; “The sentix economic index for the eurozone continued its recovery trend in June: however, the recovery is only proceeding slowly in triple steps. With the eighth increase in a row, the overall index has only just reached the zero line.”

Friday’s US jobs data has triggered fresh doubts whether the Federal Reserve will be able to cut interest rates over the next few months.

Markets consider that the chance of a September rate cut is only around 50%.

According to MUFG; “We are still sticking to our view that the Fed can cut rates more later this year but it will require further evidence of slowing inflation and/or a more marked slowdown in employment growth.”

It added; “We acknowledge though that recent developments have increased the risk that the US dollar will remain stronger for longer.”