GBP

Last week, UK inflation dropped to the target of 2% for May. However, the Bank of England voted to continue holding interest rates at 5.25%. The Bank's decision was no surprise due to the upcoming general election and the forecast that inflation could rise again in the coming months, and therefore, the FX market reaction was fairly muted.

The pound has stayed particularly strong recently, with UK interest rates expected to remain "higher for longer", but the markets are still currently pricing in an interest rate cut to 5.00% on 1st August.

At the start of this week, the pound's gains over the past two weeks have started to recede, but we should find a floor at 1.1800 on GBPEUR and 1.2650 on GBPUSD.

This week also marks the penultimate week of campaigning ahead of the General Election on Thursday 4th July. The last week was mired by ongoing reports into election data betting by people linked to Rishi Sunak or the Conservative party.

According to the latest polling data on 21st June, the Labour Party is leading the race with 41% of the vote, followed by the Conservatives with 20% and Reform UK with 17%. According to the Telegraph's election predictor, that uses the latest polling data to forecast results for each constituency, the Labour Party could walk away with 446 seats, leaving the Conservatives with 86. This is dramatically different from the last election when the Tories, under Boris Johnson, won the election with 365 seats.

In terms of significant economic events this week, the Bank of England's Governor Andrew Bailey is due to speak at a press conference about the Financial Stability Report on Thursday.

EUR

Last week started with the ECB's President, Christine Lagarde, speaking about monetary policy and economic plans for the rest of the year. On Friday, PMI data was released in Germany, France, and the Eurozone as a whole. The data came in lower than expected across the board, with both France and Germany's manufacturing output contracting in June.

Overall, the Eurozone's recovery appeared to be slowing, with new orders falling for the first time in four months. The Manufacturing PMI came in at 45.6, lower than the expected figure of 48.0 and last month's 47.3. Similarly, in the services sector, PMI data was lower than both the expected figure of 53.5 and the previous month's 53.2, coming in at 52.6, although still above the key threshold of 50, which indicates expansion.

Elsewhere in Europe, we also saw the Swiss National Bank unexpectedly cut rates to 1.25%, which also increased volatility in financial markets, especially in FX forward contract markets, where future contracts are priced based on the expected interest rates on the various currencies.