Sterling Update: Pound Steady as Labour Wins Landslide Victory

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GBP

Britain woke up to the news of a new Prime Minister this morning as the Labour Party won a landslide victory. At the time of writing, the Labour party holds 410 seats, with six constituencies left to declare.

The result is comparable to the 1997 General Election when the Labour Party won a landslide victory under Tony Blair, winning a majority of 179. During this time, the pound experienced initial volatility but eventually stabilised as markets became confident in Blair’s centrist approach and his commitment to economic stability.

While the election outcome is comparable, the impact on FX markets isn’t, with little volatility seen overnight and this morning as results trickle in.

A clear majority indicates the new Government should be able to implement many of its pre-election policies with relative ease, which could point towards a period of political stability and economic growth.

Earlier this week, we had the final services PMI data released for the UK on Wednesday, which was mostly overlooked given the main event of Thursday’s general election. These data points provide a snapshot of UK economic health, which the Bank of England will need to take note of when looking at interest rate policy ahead of their next meeting in August.

The data showed that the upturn in the UK services economy had slowed further in June, falling to a seven-month low at 51.2. This is still over the key 50 level that indicates expansion, however.

Speculation of a move to cut interest rates during August’s meeting continues to escalate for the UK, and with the cut to the energy sector price cap, which came in to force earlier this week is set to save the average household around £120 per year, potentially continuing to nudge inflation a little lower in the short term.

EUR

Last weekend the first round of voting in France delivered the expected victory for Marine Le Pen’s far-right National Rally party, taking 33.2% of the votes and pushing President Emmanuel Macron’s Ensemble Alliance down into third place also behind the Nouveau Front Populaire party.

If this trend continues through to the final round of voting on Sunday 7th July France could find themselves led by a far-right political party for the first time since World War II which is causing a ripple of concern across the bloc. The situation in France is perhaps exacerbated by the recent successes in Germany of the far-right Alternative for Germany (AfD) party ahead of next month’s European Parliament election.

As these far-right forces continue to gain strength, the single currency struggles to hold its ground, and developments will filter through to the markets. Typically, the euro is sold off over concerns that a move could derail economic growth across the EU and increase tensions throughout the European Parliament, especially with the key economies of Germany and France.

Conversely, as Marine Le Pen failed to win the anticipated majority in this first-round vote, the euro has gained some strength this morning versus the pound and the US dollar. This has been further impacted in particular against the USD with talk of tactical moves by Le Pen’s opposition to reduce candidates in the regional seats and therefore amalgamate opposition support in order to topple the balance away from the National Rally party.

As the political landscape, develops, currency rates should be monitored closely. We could experience some increased volatility depending on the outcome this weekend.

The bigger and longer-term market focus continues to rest on monetary policy. Having made the first move to cut interest rates, the focus is currently resting on the ECB and its next move. Divergence from the Federal Reserve in the US, which is looking less likely to cut rates until Q4 or even at all in 2024, is a further risk factor to the euro’s strength.

This week, there was a slew of speeches in the diary from several members of the ECB Governing Council, including President Lagarde, which could add more uncertainty to the mix for the single currency. Governing Council Member Robert Holzmann highlighted in June that further reductions in interest rates in the ECB, ahead of the Fed cutting rates, will risk a more substantial impact on the Euro exchange rate and inflation rates across the bloc. Current market expectations would suggest that we could see up to three cuts in interest rates ahead of the Fed’s first move.