ExchangeRates.org.uk - Markets are continuing to monitor European and US political developments with the Pound securing net support on hopes for UK stability.
The Pound to Dollar (GBP/USD) exchange rate has secured a net advance to 1.2840 and close to 4-month highs with the Pound to Euro (GBP/EUR) exchange rate advancing to just below 1.1850. There was a major surprise in the French parliamentary election with tactical voting having a substantial impact with the left-wing alliance (NPF) the largest party and Macron’s centrists in second while National Rally (RN) were pushed into third place.
According to UBS analyst Paul Donovan; “An unexpected result highlights that politics is becoming more important to markets, but opinion polls are less reliable as a guide to outcomes.”
Deutsche Bank (ETR:DBKGn) commented; “The NPF have the most fiscally aggressive program in terms of both spending and taxation and the market will be suspicious that the prospect of them being in government now or later will bring higher deficits with the associated concerns about debt sustainability and tense relations with Europe.” It added; “They were talking about wealth taxes and increases on taxes on corporates which won’t be market friendly.”
ING commented; “From an FX perspective, there are lingering risks for the euro moving on, and we continue to see the common currency as a likely laggard in the G10 space.” In this context, it added; “We see some downside risks for GBP/USD this week given the spillover from EU political risk.”
In contrast, the UK Labour Party will have a commanding majority when the House of Commons returns on Tuesday.
MUFG commented on the Pound outlook; “We see political stability as a positive and assume no dramatic or imminent shift in fiscal policy.” The bank added; “The new government is certainly starting with the growth outlook at its brightest since covid struck in 2020. Stronger Q1 GDP growth and rising consumer and business sentiment should see the pound continue to outperform many other G10 currencies.”
Domestic and international factors will be key for the Pound. In particular, Bank of England (BoE) policy will be a key element.
ING commented; "We doubt that fiscal prospects will have an impact on the pound just yet, while developments in French politics, US macro and Bank of England rate expectations will remain the largest sterling drivers."
With the election out of the way, the BoE is out of its blackout period with comments watched closely.
According to ADM Investor Services global economist Marc Ostwald; "Haskel delivers the first BoE speech since the election was called, and with many expecting a rate cut next month, his speech will be closely watched." MUFG did note some evidence that all the positive factors are priced in to the Pound; “We identify the divergence in the relationship between GBP/USD and the calculated fair value where GBP/USD has appreciated in recent weeks and currently overvalued by 1.83%.” In the US, there is still significant speculation that President Biden will withdraw from the November election.
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