Election Jitters and Inflation Fears: The British Pound, US Dollar, and Euro in Focus.

• GBP Election Impact: The British Pound is poised for potential volatility around the 10 PM exit poll release during the 2024 General Election, with a strong Labour victory expected to boost the Pound due to increased certainty.
• Polling Predictions: Final polls suggest a significant Labour win, potentially the largest majority since 1832, which could lead to a higher Pound exchange rate against the Euro.
• Risk of Conservative Upset: Unexpectedly strong Conservative performance or a hung parliament could introduce uncertainty, weakening the Pound.
• USD Fed Concerns: June FOMC meeting minutes highlight ongoing inflation concerns, with a cautious stance on lowering interest rates until sustainable progress is evident.
• EUR Stability: French election tensions have eased, but the Euro remained flat despite positive economic signals, reflecting contained regional risks and increased risk appetite.

GBP: British Pound Faces Election Night Jitters Amid General Election 2024

The British Pound is heading into the 2024 General Election with a boost, but could face volatility around 10 PM when the exit poll is announced. This exit poll is crucial as it often provides an accurate prediction of the next Prime Minister and the likely majority they will command. According to Shreyas Gopal, a Strategist at Deutsche Bank, “The exit poll has largely been accurate in six of the past seven elections. An exit poll showing anything other than a healthy majority would be a significant shock.” The anticipated outcome is a strong victory for Keir Starmer’s Labour Party, which could see the Pound rise as certainty usually benefits currencies, reducing any lingering risk premium.

Barclays supports this view, expecting the Pound to strengthen further, especially against the Euro. They note, “Thursday’s general election is this week’s main focus, with most plausible scenarios – according to available opinion polls – catalyzing further pound strength.” A final large-scale YouGov poll predicts the Conservatives will drastically lose seats, giving Labour the largest majority in the House of Commons since 1832.

Deutsche Bank’s Gopal suggests that with signs of a strong Labour showing, the Pound may remain broadly stable. The impact on the EUR/GBP will depend more on the results of the second round of the French election. However, if the Conservatives perform better than expected, this could introduce uncertainty, potentially weakening the Pound. A hung parliament scenario might see the Pound to Euro exchange rate dip below 1.18, and further complications from the French vote could push it towards 1.1750 or 1.17. The Pound to Dollar exchange rate could also fall to 1.27, influenced by the upcoming U.S. jobs report.

USD: Fed Maintains Vigilance Amid Inflation Concerns

Minutes from the June FOMC meeting reveal ongoing concerns about the slow progress in reducing inflation this year. Participants emphasized that lowering interest rates would only be appropriate when there is greater confidence that inflation is moving sustainably towards the 2% target. They discussed risk management, noting improved balance in achieving employment and inflation goals due to eased labor market tightness and declining inflation. They believe current monetary policy is well-positioned to address existing risks.

Most participants noted economic activity is gradually cooling, viewing the current policy stance as restrictive. However, some expressed uncertainty about the degree of restrictiveness, suggesting the economy’s strength and other factors might indicate a higher longer-run equilibrium interest rate than previously assessed. This would imply that monetary policy and financial conditions might be less restrictive than they appear. Several participants noted that if inflation remains elevated, the target range for the federal funds rate might need to be raised. Conversely, some emphasized that with the labor market normalizing, further weakening in demand could lead to a larger increase in unemployment.

EUR: Eased Tensions and Modest Gains Amid French Election Developments

Tensions related to the French elections have eased, with the 10-year spread of French bonds versus Bunds tightening by almost 5 basis points to just below 70 basis points. Another market risk measure, the Bund ASW spread, has also tightened to levels seen before the French snap elections, as have implied bond volatility measures. These still-elevated French spreads now seem to reflect risks contained largely within the country, justified by the baseline outcome of a hung parliament not boding well for fiscal issues.

The Euro struggled for investor attention following a slight downward revision in the Eurozone’s final services PMI, slipping from May’s reading of 53.2 to 52.8, though it beat forecasts of 52.6 and marked the fifth consecutive month of expansion. Economists at the Hamburg Commercial Bank noted that the chances are good for service providers to remain a key force in positive economic growth for the rest of the year. However, the Euro remained flat against most peers as risk appetite increased, undermining the safe-haven currency.