EUR

GBPEUR posted a fresh high this morning, finally breaking the psychological 1.18 barrier on interbank exchange rates that had previously kept the pair contained. The pair hasn’t reached this level since August 2022.

The move appears to be due to the political uncertainty that this weekend's European Parliamentary elections have caused, sending ripples through many EU governments. Several popular far-right parties have made striking gains across France, Germany, Belgium, and Austria.

These far-right parties are predicted to have taken up a quarter of the Member of European Parliament (MEP) seats in Brussels, potentially changing the political landscape across the bloc. In particular, the focus amongst voters in this sector is immigration policies, the lack of sovereignty for EU member countries, and pushback against green energy initiatives.

The swing in votes was so significant that Belgium's Prime Minister, Alexander De Croo, resigned, and French President Emmanual Macron has called a shock snap election across the channel. This vote will now take place three years sooner than necessary.

With the first round of elections due to take place in France on 30th June and 7th July, President Macron has taken a risk in calling this election while his main opponent, Marine Le Pen, surges in popularity. Le Pen's National Rally party won more than 31% of the vote, more than double Macron's Renaissance party which took 15%.

This euro weakness follows the very muted response from markets on Thursday in response to the European Central Bank moving to cut its key interest rate by 0.25% to 3.75%, the first time that it has cut rates since 2019.

This is a significant shift in policy for the ECB, which had been holding interest rates at record highs since September 2023 as it has attempted to control the rocketing inflation that followed the global pandemic and the start of the Russia-Ukraine war.

Inflation in Europe fell to 2.6% in May and is expected to drop back within its 2% target range before the end of this year.  Despite the significance of this swing in monetary policy, exchange rates were hardly impacted as the expectation had been clearly outlined in commentary from ECB President Christine Lagarde for some time, and there had been a quiet end to trading last week across the board.

GBP

The pound has capitalised on euro weakness this morning as a stagnant end to last week has failed to transition to the new week. With very little of note to speak of in terms of data releases today, we have to look towards tomorrow's unemployment data and Wednesday's manufacturing data for signals on whether sterling can maintain this morning's strength and perhaps even push higher towards the next key break in rates of 1.19 versus the euro.

The UK unemployment rate is expected to remain unchanged at 4.3% on the release, which is positive. However, with the mean levels historically lower, it demonstrates that the UK economy is not quite operating at full health or returning fully to growth cycles because there are still barriers to entry within the employment market.

On Wednesday we’ll see the latest data released from the manufacturing sector, as well as GDP growth figures for April. Having seen some green shoots in the manufacturing sector over recent weeks, if this trend continues, it could help maintain GBP buoyancy.

However, the unmeasurable risk to GBP is currently running into the UK general elections on the 4th July. This week, we will continue to see a ramp-up in efforts on the election campaign trail, and given the impact this morning on FX rates following the snap election announcement in France, we cannot rule out a market reaction to political events as they unfold. With the UK elections on the 4th and France’s first round election dates set for the 30th June and 7th July, political uncertainty could be a growing factor for analysts over the weeks ahead.