Labour’s Landslide Victory Shakes Up UK Politics.

• Labour’s Historic Win: The Labour Party has secured a decisive victory in the UK general election, winning 410 of 650 seats, significantly outperforming their 2019 results and reducing the Conservative Party to just 119 seats.
• Market Reactions: Despite the political shakeup, the British Pound remains stable and the FTSE 100 is up 0.2%, indicating markets had already priced in a Labour majority, appreciating the political stability it brings.
• GBP/USD Movement: The GBP/USD pair rose by 0.2% to 1.2780, marking its best weekly performance since mid-May, driven by the end of 14 years of Conservative rule and the anticipation of more stable governance.
• US Economic Expectations: The US dollar is near two-week lows as markets await the monthly jobs report, with expectations of a Federal Reserve rate cut increasing due to signs of a cooling economy.
• French Election Impact: As France heads into the second round of parliamentary elections, the far-right National Rally is expected to be the largest party but may fall short of a majority, reducing concerns about major spending increases and stabilizing the euro.

GBP: The Labour Party is set to take over No.10 Downing Street later this morning following a historic win in the UK general election. With only a few seats yet to be declared, Labour has secured 410 out of 650 seats, a gain of over 200 from the 2019 election. The Conservative Party has suffered a significant defeat, polling just 119 seats, a drop of 248 seats. While a Labour victory by a wide margin was anticipated, the extent of the Conservative losses, including many prominent figures, marks a substantial shift in UK politics.

UK asset markets had anticipated a large Labour majority since the election was called, reflected in today’s tepid market movements. The British Pound remains relatively stable against various currencies, and the FTSE 100 is up around 0.2%. Financial markets prefer political stability, which may bolster market confidence ahead of significant policy announcements. GBP/USD increased by 0.2% to 1.2780, nearing a three-week high of 1.2777, following Labour’s overwhelming victory that ended 14 years of Conservative rule. The pound has risen 1% for the week, marking its best weekly performance since mid-May. The anticipated governmental change is seen as an opportunity for stability, despite the challenging fiscal environment after years of volatility under the Conservatives.

“We believe the new chancellor can avoid spending cuts with minor fiscal rule adjustments and slight tax tweaks. However, avoiding a tax increase in the future will be challenging,” said ING. “For sterling, the primary concern is the implications for Bank of England policy. Currently, there are none.” EUR/USD rose 0.2% to 1.0827, ahead of France’s second round of parliamentary elections on Sunday. Polls suggest the far-right National Rally will likely fall short of a majority. The euro, pressured since the elections were announced in June, is up about 1% this week as fears of significant spending increases under RN diminish. “We see potential for EUR/USD to move higher today, but the risk of French bond spreads widening after Sunday’s election limits the upside,” ING noted.

USD: The dollar is trading near two-week lows as traders return from the U.S. Independence Day holiday, anticipating the release of the monthly jobs report for further clues on when the Federal Reserve might start cutting interest rates. This week’s economic data indicate a cooling U.S. economy, raising expectations of a Fed rate cut soon. Traders are pricing in a 73% chance of a cut in September, according to the CME FedWatch tool. Economists predict the U.S. economy added 189,000 jobs in June, down from 272,000 the previous month. “We expect a softer reading today due to the drop in the ISM services index employment component,” ING analysts said. “However, for a significant dovish shift in Fed rate expectations, payrolls need to fall below 150k, given the June Fed Dot Plot and the increasing likelihood of a Trump win in November as hawkish counterweights.”

EUR: France will vote on Sunday in the second round of parliamentary elections. Mary Le Pen’s far-right party is projected to be the largest in parliament, but the critical question is whether she can secure a majority with other right-wing parties. A Le Pen majority would be a significant blow to French President Macron and could unsettle financial markets. The European Central Bank remains neutral but is concerned about the potential fallout from a Le Pen victory. ECB President Lagarde, speaking at the ECB forum in Portugal, focused on inflation and rate policy. She stated that the ECB is “very advanced on the disinflationary path” and aims to achieve the 2% inflation target by Q4 2025. Lagarde warned that the path to 2% inflation would be “bumpy” through 2024, and the ECB would proceed cautiously with further rate cuts. The ECB made a significant policy shift in June with its first rate cut since 2019.