EUR/GBP recovery to near 0.8450 appears stalling as France encounters hung Parliament
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- EUR/GBP lacks the strength to extend its recovery above 0.8450 as France faces political uncertainty.
- ECB Knot supports for keeping interest rates steady in July but is open for the September meeting.
- The Pound Sterling remains firm as UK Keir Starmer’s victory brings political stability.
The EUR/GBP pair struggles to extend recovery above the immediate resistance of 0.8450 in Tuesday’s early European session. The upside in the cross appears to have been limited by French’s political uncertainty as the Left Wing, also known as New Popular Front, led by Jean-Luc Melenchon unexpectedly gained an upper hand with President Emmanuel Macron's centrist alliance and Marine Le Pen-led-Far Right National Rally as runner ups.
Market participants expect that the Central Alliance will join hands with the Left Wing to form a coalition government, which will pass through significant negotiations for distribution of new ministers. While fears of widening French debt crisis have eased as Far Right fails to make an absolute majority, which was expected to have favored expansionary fiscal measures.
On the monetary policy front, the debate about whether the European Central Bank (ECB) will deliver subsequent rate cuts is gaining traction. ECB officials are scheduled to meet on July 18. On Monday, ECB policymaker and Dutch central bank chief Klaas Knot said in an interview with Handelsblatt, I don't see a case for another rate cut in July." However, he said that he is comfortable with market expectations of more rate cuts this year and he is open for the September meeting.
In the United Kingdom region, uncertainty over the Bank of England (BoE) 's decision to begin reducing interest rates from the August meeting has deepened. On Monday, BoE policymaker Jonathan Haskel supported leaving interest rates unchanged for as long as price pressures remain firm in the labor market. The UK’s wage growth is significantly higher than what is required to bring service inflation down.
Meanwhile, the broader appeal of the Pound Sterling remains firm against the Euro. The absolute victory of Keir Starmer's Labour Party against Rishi Sunak's Conservative Party in UK parliamentary elections has brought political stability to the economy, which is favorable for the economy’s financial markets.
Economic Indicator
BoE's Haskel speech
Jonathan Haskel will serve a 3-year term as a Bank of England Monetary Policy Committee member from September 2018, replacing Ian McCafferty. Professor Haskel is currently a Professor of Economics at Imperial College Business School, where he will continue to teach part-time, and prior to that was Head of the Economics Department at Queen Mary, University of London. He is a Non-Executive Director of the UK Statistics Authority and has expertise in productivity growth, and particularly intangible assets.
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Source: Bank of England
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