Diverging Opinions on GBP, EUR, and USD Movements.
- British Pound vs. Euro: The British Pound may reach its highest level against the Euro since 2016, driven by potential election outcomes in France and the UK. However, a major investment bank disagrees with this optimistic forecast.
- French Election Impact: If Emmanuel Macron’s centrist alliance performs poorly and the UK’s Labour Party wins a moderate majority, EUR/GBP could drop to 0.80, translating to a Pound to Euro rate of 1.25. A hung parliament or civil unrest in France could further pressure the Euro.
- UK Election Influence on GBP: While some analysts see Labour’s expected victory as beneficial for GBP, HSBC predicts the UK election will have minimal impact on the Pound. Instead, they foresee a gradual weakening tied to interest rate movements and Bank of England decisions.
- Interest Rates and GBP Outlook: HSBC believes the Pound’s strength is overstretched and anticipates a reassessment once the Bank of England begins its easing cycle. They forecast the Pound-Dollar at 1.25 and Euro-Pound at 0.84 by year-end.
- US Dollar Challenges: The USD faced headwinds due to lack of macroeconomic data, risk-averse trading, and expectations of Federal Reserve rate cuts by September 2024. Despite the Fed’s hawkish stance, increasing market projections for rate cuts are influencing USD exchange rates.
EUR: A Potential Surge for the British Pound?
A new analysis suggests the British Pound might reach its highest level against the Euro since 2016, though one major investment bank holds a different view. Reuters market analyst Robert Howard links a potential rise to post-Brexit highs with the outcomes of upcoming French and UK elections. “EUR/GBP could slide to 0.80 for the first time in eight years if Emmanuel Macron’s centrist alliance underperforms in the French parliamentary election and the UK’s pro-business Labour Party secures a ‘goldilocks’ majority next week,” Howard explains. This drop in the Euro-Pound to 0.80 would convert to a Pound to Euro exchange rate of 1.25, a level last seen when the UK voted to leave the EU in 2016. Howard notes that a poor showing from Macron’s alliance could lead to a far-right National Rally or left-wing New Popular Front majority in the National Assembly, potentially weakening the euro significantly. Despite current polls suggesting a hung parliament and no party securing a majority, political deadlock in France could still negatively impact the euro, especially if accompanied by civil unrest or violence. Although losing legislative control is not ideal for Macron’s reformist agenda, it’s not the worst-case scenario for the euro, which has recently recovered as markets anticipate such an outcome and the risk of extreme majorities diminishes.
GBP: Mixed Forecasts Amid Political Uncertainty
“The pound could gain if Labour’s expected majority is seen as just right,” says Howard, indicating an ideal majority would be around 160 seats. However, HSBC’s analysis suggests the UK election might be a non-event for the Pound. “We doubt the elections will significantly boost GBP. Instead, we foresee a gradual weakening tied to interest rates,” states Paul Mackel, head of FX research at HSBC. He argues the market has likely already priced in a Labour victory, and a more pro-EU Labour stance might not make a significant difference without a move towards the EU customs union, which Labour has ruled out. HSBC believes interest rates and the Bank of England’s decisions are crucial. “GBP’s current strength is stretched,” says Mackel. “The start of the BoE’s easing cycle could prompt a reassessment of the currency.” HSBC predicts the Pound-Dollar will end the year at 1.25, and Euro-Pound at 0.84 (Pound-Euro at 1.19). The Pound to Euro (GBP/EUR) exchange rate has been declining, hitting 10-day lows around 1.1815 amid stronger expectations of a BoE interest rate cut in August. The Pound could fall further if market confidence in an August rate cut grows.
USD: Facing Headwinds Amid Rate Cut Speculations
On Monday, the US Dollar (USD) struggled due to a lack of macroeconomic data releases in the US. Additionally, risk-averse trading and a slight dip in US Treasury yields reduced investor interest in the safe-haven ‘greenback’. Increasing expectations that the Federal Reserve might lower interest rates as early as September 2024 also weighed on USD exchange rates. Despite the Fed’s recent hawkish stance, the CME FedWatch Tool now shows nearly a 60% chance of a policy easing in the third quarter of 2024, with more economists supporting this view. Sujan Hajra, Chief Economist & Executive Director at Anand Rathi Shares and Stock Brokers, said, “We expect the Fed to begin cutting rates by September 2024, aligning with consensus forecasts.” Looking ahead, several Fed policymakers are scheduled to speak this week, starting with Mary Daly on Monday night. Should any policymakers maintain a hawkish tone, the ‘greenback’ could gain some support, suggesting that the Fed’s hawkish consensus remains intact despite rising market projections for rate cuts.