Above: Emmanuel MACRON, President of France. Copyright: European Union.
The value of the pound to euro conversion surged on Monday to deliver the best exchange rates for euro buyers in 34 months.
The euro is under broad pressure, with analysts blaming snap elections in France and the apparent success of EU-skeptic parties in European Parliament elections.
“Further” right-wing parties did very well in the EU elections this weekend, especially in France and Italy, where the National Rally (RN) and Brothers of Italy (FdI) came out on top. French President Emmanuel Macron responded by dissolving parliament and calling early legislative elections, sparking political uncertainty for the bloc.
Roberto Mialich, FX analyst at UniCredit in Milan, says the euro has been “forced to retreat” following the outcome of the European elections, which prompted French President Macron to call early elections in France.
Ulrich Leuchtmann, head of FX and commodities research at Commerzbank and Frankfurt, says the euro’s weakness follows the European Parliament elections, where “Eurosceptics and anti-EU parties made gains, especially in the big EU countries.” And there are new elections in France. the outcome could complicate policy-making in France.”
“Poor performances by incumbent political parties in France and Germany in the European Parliament elections at the weekend – plus President Macron’s decision to dissolve parliament – weigh on the single currency,” says Chris Turner, head of FX analysis at ING Bank.
Sterling, meanwhile, finds itself well supported, rising against all its major peers except the dollar.
Amount: GBP/EUR at weekly intervals. Track GBP/EUR with custom rate alerts. Set here
The pound-euro exchange rate rose to 1.1824 on Monday, extending a rally that was triggered on Friday by a strong US jobs report that reduced the chances of a US interest rate cut. The development also reduced the chances of a rate cut in the UK, as markets bet the Bank of England would follow the Fed and delay the start of a rate-cutting cycle.
This boosts UK bond yields and the pound.
GBP/EUR price action is therefore driven by factors outside the UK. A look at the performance panel shows that the pound is the main beneficiary of the revision in US interest rate expectations, rising against all G10 peers except the dollar.
The main event for sterling next week is the UK wages print due on Wednesday: “It’s a big data week for the UK with the April labor market and GDP reports. That will be closely watched by the MPC,” says Sanjay. Raja, chief economist at Deutsche Bank.
If regular wages beat expectations by 6.1%, then the pound could rally as it signals that the Bank of England’s Monetary Policy Committee (MPC) will be cautious about raising interest rates in August, as this could increase the risk of a re-ignition of domestic inflation.
“With the MPC’s focus on private sector wage growth, we will be paying close attention to where AWE regular wages (including private sector pay) land in the all-important month of April (where we should see most pay deals reset – including the full implementation of the new national living wage),” says Raja.
Also watch for Thursday’s UK GDP print, where markets expect a 0.1% month-on-month rise in April, with the year-on-year rate hitting 0.7%.
“March saw a big surprise for GDP growth on the back of strong results in consumer services and health. We expect some rebound in April. Retail sales fell sharply that month,” said Andrew Goodwin, chief UK economist at Oxford Economics.
Any underperformance against expectations could see the pound retrace some of its recent gains.
It is a quiet week in the Eurozone with no major events on the calendar.