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Pound Euro (GBP/EUR) Exchange Rate Slopes despite French Parliamentary Uncertainty

June 20, 2022 - Written by John Cameron


GBP/EUR Exchange Rate Weakens in French Election Aftermath

The Pound Euro (GBP/EUR) exchange rate sloped gently lower today, despite a degree of political uncertainty in the bloc following the loss of French President Emmanuel Macron’s parliamentary majority.

The presence of a risk-off market mood may have helped the Euro (EUR) to gain initial upside against the Pound (GBP).

At the time of writing, GBP/EUR is trading at €1.1623, down 0.2% from today’s opening levels.

Euro (EUR) Enjoys Upside on Lagarde Speech

The Euro is trading in a mixed range today, somewhat subdued by France’s political scene but uplifted for the most part by European Central Bank (ECB)-related tailwinds and an alternating risk-off mood.

While EUR comes under pressure against safe-haven currencies when risk appetite diminishes, subdued market sentiment elevates the single currency against perceived-riskier peers. Consequently, the Euro found support against the Pound this morning as the session opened amid bearish headwinds.

Furthermore, expectations for the ECB’s July rate decision are hawkish, following last week’s unscheduled brief following widening bond spreads in Europe. ECB President Christine Lagarde committed to implement a 25bps hike next month - the bank’s first hike since 2011 - and signalled that a larger move is likely in September.

Such commitments were reiterated today as Lagarde testified before the European parliament. Explaining the move, she said:

‘Price rises are becoming more widespread across sectors and measures of underlying inflation have risen further. We expect to raise the key ECB interest rates again in September.’

Lagarde also referred back to the issue of fragmentation within the bloc’s economic recovery, acknowledging that ‘the fight against fragmentation is a precondition to the success of the monetary policy.’

Elsewhere, in France, the public are digesting the news that Emmanuel Macron’s centrist alliance lost its absolute majority in parliament in the legislative election at the weekend.

The negative news seems to have had a limited impact upon EUR sentiment, although Macron now faces a challenge on delivering key policies and will need to seek alliances and compromises to push measures through parliament.

Pound (GBP) Slips on Downbeat Mann Comments

The Pound has come under pressure today from unsteady risk sentiment, a lack of significant UK data and a downbeat forecast from the Bank of England (BoE).

An initial risk-off mood in the currency markets capped gains for Sterling, as investors flocked to safe-haven assets. Even as risk appetite recovered, GBP gains were marginal on account of quiet trading in the UK – traders looked to central bank dynamics for inspiration.

Comments from BoE policymakers were therefore scrutinised for any indication of the UK’s economic situation: Catherine Mann spoke of stagflation with matter-of-fact directness, keen to dispel any delusions of rapid recovery and growth.

Mann cited ‘increasingly domestic embeddedness’, ‘very high inflation’ and ‘depreciation pressure upon Sterling’, weighing further upon GBP sentiment. The central bank representative voted for a 50bps at the last BoE meeting to address skyrocketing inflation and maintained today that:

‘It is important to react in a timely fashion to a US monetary policy shock that causes the UK price level to jump…

If near-term inflation is the dominant concern, then the activist path addresses that.’

As investors digested the BoE policymaker’s comments, a similarity was noted between the UK’s central bank and the Federal Reserve: namely, that multiple Fed representatives agreed on the necessity for decisive and affirmative action to get inflation under control.

GBP/EUR Exchange Rate Forecast: Central Bank Dynamics to Direct Further Movement?

Looking ahead, the Pound Euro exchange rate may be further affected by central bank dynamics into tomorrow’s session.

If Andrea Enria and Elizabeth McCaul renew Lagarde’s affirmations that consecutive rate hikes are forthcoming, the Euro could enjoy further tailwinds, while optimistic comments from BoE chief economist Huw Pill may lend the Pound some support.

Elsewhere, data from the Confederation of British Industry may counter Sterling upside, if June’s industrial trends orders fell to 22 from 26 in May, as expected.

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