Euro Weakens, Dollar Strengthens, Pound Rallies.

• Euro Decline: The Euro is falling ahead of French legislative elections, with the National Rally (RN) leading in polls, causing investor caution due to political uncertainty.
• Dollar Strength: The U.S. dollar strengthened due to hawkish Federal Reserve comments and strong economic data, particularly in housing prices and consumer confidence.
• Fed Stance: Fed Governor Michelle Bowman’s statements on maintaining policy rates to control inflation and willingness to raise borrowing costs supported the dollar.
• Pound Rally: The British pound surged as traders anticipated a Labour Party victory in the upcoming election, betting on reduced political volatility and economic recovery.
• Investor Concerns: The future strength of the pound depends on Labour’s ability to address economic challenges, including high public debt and declining foreign direct investment, while maintaining investor confidence.

Euro Slumps Ahead of French Elections

EUR: The Euro is on the decline again as the upcoming French legislative elections catch the attention of investors. The first round of voting is set for Sunday, and the National Rally (RN) appears poised to secure the most votes. According to The Economist’s poll tracker, the RN leads with 37%, followed by the left-wing New Popular Front at 29%, and Emmanuel Macron’s Ensemble at 21%. “EUR/USD traded in a narrow range around 1.0710. The spread between the French and German 10-year government bond yields has narrowed slightly over the past two days, though remains historically elevated at 76bp. Political uncertainty in France will continue to keep a lid on EUR in our view,” says Carol Kong, an analyst at Commonwealth Bank. A Bloomberg poll of polls sees Marine Le Pen’s National Rally’s lead widening to over 35%, with the New Popular Front stable at 28%. The Euro initially fell sharply when the vote was unexpectedly called by Macron but has since recovered some losses. Analysts suggest this recovery may be due to the RN’s attempts to reassure voters that it won’t take drastic actions that could trigger a bond crisis. The experience of former UK Prime Minister Liz Truss serves as a reminder of how markets can react negatively to fiscal policies lacking credible funding plans.

Dollar Gains on Hawkish Fed and Strong Data

USD: The U.S. dollar strengthened against most major currencies on Tuesday, driven by hawkish comments from a Federal Reserve official and better-than-expected economic data. The greenback rose against the euro, yen, Swiss franc, sterling, and commodity currencies like the Australian and New Zealand dollars. Fed Governor Michelle Bowman reiterated her view that maintaining the policy rate “for some time” will likely control inflation, while also expressing her willingness to raise borrowing costs if necessary. Supporting the dollar further was a report showing U.S. single-family home prices increased steadily in April, rising 0.2% after being unchanged in March. Over the year, house prices increased by 6.3% in April compared to 6.7% in March. U.S. consumer confidence slightly eased in June, with the index at 100.4 from a revised 101.3 in May, slightly above market expectations. The dollar extended its gains following this data. “The weakness in previous data like retail sales and jobless claims is not enough to spark a dollar weakness,” said Thierry Wizman, global FX and rates strategist at Macquarie. “For dollar weakness, we need not just some soft data in the U.S. but also a Fed rate cut acceleration. We need a divergence in data that favors the rest of the world.” Investors are now focusing on Friday’s release of the U.S. personal consumption expenditures (PCE) price index, the Fed’s preferred measure of inflation.

Pound Rallies Ahead of Expected Labour Win

GBP: The British pound has rallied in anticipation of a likely landslide victory for the opposition Labour Party, but the currency’s future hinges on the new government’s ability to convince investors of its economic plans. On a trade-weighted basis, sterling has returned to levels last seen since the 2016 Brexit vote, as traders bet on reduced volatility under a new administration. If Labour wins on July 4, the left-of-centre government will need to maintain investor trust while addressing economic challenges left by the Conservatives, according to over 20 economists and former officials. UK public debt-to-GDP is at a 63-year high, and foreign direct investment has declined in four of the last five quarters up to the end of 2023. To avoid spending cuts, Labour will need to raise taxes or increase borrowing, the Institute for Fiscal Studies suggests. Investors are assessing the next government’s response to these issues, with the balance of risks for sterling skewed because a strong Labour majority has already been priced in. “A less confident political scenario will weaken sterling much more and make it much more volatile,” said Costas Milas, finance professor at Liverpool University. Labour, led by Keir Starmer, holds about a 20-point lead over the Conservatives in polls.