• BoE Pause and UK Elections: The Bank of England’s dovish pause in June, coupled with uncertainty surrounding the upcoming UK general elections, is putting pressure on the British Pound (GBP).
• Fed Chair’s Dovish Remarks: Fed Chair Jerome Powell’s comments on significant progress on inflation have reinforced expectations of rate cuts in September and December, weakening the US Dollar (USD).
• US Bond Yields and Market Sentiment: A modest decline in US Treasury bond yields and cautious market sentiment ahead of key economic reports and the FOMC meeting minutes are keeping USD bulls on the defensive.
• European Inflation Data: The Pan-EU Core HICP inflation remained steady in June, while overall HICP inflation eased slightly but stayed above the ECB’s 2% target, with upcoming PPI and PMI figures being closely watched.
• GBP/EUR Stability Amid Political Risks: The GBP has stabilized against the Euro ahead of the final round of French elections and the UK general election, with potential volatility if unexpected results occur, especially a hung parliament in the UK.

USD: Market Jitters and Fed Expectations

Following the Bank of England’s (BoE) dovish pause in June, which raised speculations of a rate cut in August, the looming UK general elections on Thursday create additional pressure on the British Pound (GBP). Meanwhile, the US Dollar (USD) is struggling to gain traction after Fed Chair Jerome Powell’s dovish remarks on Tuesday. Powell noted significant progress on inflation, suggesting the US is back on a disinflationary path. His comments have reinforced market expectations that the Fed may start its rate-cutting cycle in September and again in December. This, coupled with a slight decline in US Treasury bond yields, puts USD bulls on the defensive, thereby supporting the GBP/USD pair. Expectations that a Trump presidency could be more inflationary than a Biden administration might help limit the downside for US bond yields and the Greenback. Traders remain cautious, awaiting more clarity on the Fed’s rate-cut path before making significant moves. The focus now shifts to the FOMC meeting minutes due later in the US session. Additionally, Wednesday’s US economic docket, featuring the ADP report on private-sector employment and the ISM Services PMI, might provide some impetus to the GBP/USD pair. However, immediate market reactions are expected to be limited ahead of these key events.

EUR: Inflation Steady as Markets Await Key Data

The Pan-EU HCOB Core Harmonized Index of Consumer Prices (HICP) inflation held steady at 2.9% MoM in June, defying forecasts of a decline to 2.8%. Overall YoY HICP inflation eased to 2.5% as expected, down from 2.6%, but still remains well above the European Central Bank’s (ECB) 2% target. The upcoming European market session will feature the final Producer Price Index (PPI) and HCOB Purchasing Managers Index (PMI) figures, while the US session will see the release of the ISM Services PMI and ADP Employment Change numbers, a precursor to Friday’s US Nonfarm Payrolls (NFP) data. The pan-EU Composite PMI for June is expected to hold steady at 50.8, with May’s annualized European PPI anticipated to improve slightly to -4.1% YoY from -5.7%. ECB President Christine Lagarde is set to make a statement near the end of the European session, and the FOMC’s latest Meeting Minutes will be released later in the day.

GBP: Election Uncertainty and Market Stability

The Pound Sterling has regained some ground against the Euro as markets stabilize ahead of Sunday’s final round of French elections, which could result in a majority for the National Rally (RN). However, the immediate focus is on Thursday’s UK General Election, expected to cause minimal volatility with a predicted Labour win. There is a risk that the Conservatives might perform better than polls suggest, possibly resulting in a hung parliament. While not necessarily detrimental to the Pound, political uncertainty tends to be unfavorable. The GBP/EUR exchange rate could dip into the mid-1.1750s if Thursday night’s exit poll, due at 10 PM, surprises markets. Despite this, the main parties’ fiscal policies are unlikely to cause lasting damage to the Pound’s value. The GBP/EUR rate fell below 1.18 on Monday as the likelihood of Marine Le Pen’s RN forming a majority diminished after the first round of voting. The outcome of Sunday’s second round remains uncertain as French voters face a polarized political landscape. “Some form of hung parliament seems most likely, which, while not ideal, is better than some alternatives. Near-term EUR risks remain to the downside,” says Derek Halpenny, head of FX research at MUFG Bank Ltd. Evelyne Gomez-Liechti, Rates Strategist at Mizuho, estimates a 60% chance of a hung parliament, with 25% probability of an RN majority and 15% of an Ensemble + left parties’ coalition.