GBP rises on UK election but faces risks from economic data + More

Euro expected to trade in 1.05-1.08 range against dollar in second half of 2024

by Faruk Imamovic
GBP rises on UK election but faces risks from economic data + More
© Getty Images/Matt Cardy
  • - The GBP/USD is getting a fillip from the results of the UK's Parliamentary election, since Labour's victory implies a rejection of the Brexit project. Still, GBP/USD could reverse its recent gains if June CPI and wage growth are weak, compelling the BoE to cut the Bank Rate on August 1.
  • - We'll pay attention today to whether the June US unemployment rate breaks above 4.0%, which was the Fed's median year-end projection in its June SEP. A break above 4.0% would signal a labor market that's loosening faster than the Fed had surmised, and so might make the choice between one and two rate cuts in 2024 less of a "close call" for the Fed.

Ahead of a US trading session that will be dominated by the June employment report, sentiment in Europe seems to be robust, both for stocks and the major currencies. Both the GBP/USD and the EUR/USD are up by a few pips, although this partly reflects a bit of general disdain for the USD too. FX traders are contemplating now not just the slowdown in the US data over the past few weeks, but also the shift in the Fed's tone toward "dovishness". This was reflected in Jay Powell's tone earlier this week, but also in the tone of the FOMC Minutes (June 12) released on Wednesday in the US. In those Minutes, meeting participants managed to invoke many of the trends that point to the deterioration of demand conditions and the improvement in supply conditions in recent months, more so than they have previously. The Minutes supported his Jay Powell's comment on June 12 about the the decision between 1 and 2 rate cuts (in the 'dots') having been a "close call" for Fed officials. USD OIS forward yields are now more decidedly pointing to two rate cuts, rather than one, with the first coming in September.


As for the GBP/USD, the fillip its been given today - up 25 pips - is also coming partly from yesterday's Parliamentary election. Labour won a large majority of the 650 seats in the House of Commons - 409 as of the official count, but at least 411 as of unofficial counts this morning. Of course, some traders interpret the rejection of the Conservatives as a refutation of Brexit. And so, they also interpret the political shift as a structural positive for GBP, insofar as it also signals a possible reintegration of the UK into the EU at some distant day in the future. We'll note also that the Scottish National Party (SNP) saw its seats decline from 47 to merely 9 - in what looks like a rejection of Scotland's independence movement. That too may be giving the GBP some sympathy following the vote. Still, these aren't imminent themes, and were largely expected, anyway.

GBP rises on UK election but faces risks from economic data + More
GBP rises on UK election but faces risks from economic data + More© Getty Images/Christopher Furlong

Equally important, perhaps, is that despite the shift to Labour, the UK's fiscal policy is likely to remain constrained as a result of the large public debt and a challenging structural outlook. So Labour hasn't pledged to spend more, and has pledged to support business.

Yet there shall be weakness for the GBP/USD again should the BoE cut the Bank Rate (from 5.25%) on August 1, we think, insofar as that scenario is not yet fully priced in the GBP OIS market. What is fully priced is two rate cuts by year-end, however. Speculative positioning in GBP/USD has been net long too, ahead of the Parliamentary election, which bolsters the case for GBP/USD to reverse its gains in the weeks ahead. The UK's CPI report on July 17 and the wage report on June 18 are the key upcoming events that will drive the BoE MPC's decision on August 1. A decision to cut will likely bring the pair squarely back into the 1.26-1.28 range.


As for the EUR, an ongoing stream of reports (e.g., here) suggesting that France's National Rally will not be able to secure a majority of the 577 seats in the election for the National Assembly on Sunday - neither alone nor in concert with elements of other parties - has dialed back the fears of a lack of fiscal restraint in France, under a new Prime Ministership. The EUR/USD has so far climbed on this political trend, and one-week implied volatility in the EUR/USD trades at 6.7%. Implied volatility had reached a high of 8.3% on June 28, just ahead of the 1st-round vote last Sunday.

It's hard to see a EUR/USD rally past 1.08 that becomes durable in the medium term, unless the Fed produces two rate cuts in 2024 and the US economy is seen to suffer more than the Euro area's or the rest-of-the-world's, analysts think. For now, all seem to be suffering again. The poor ISM services index in the US on Wednesday seemed to confirm the US slowdown in Q2, but the composite PMIs have suffered in the Euro area, Canada, etc., in June, too, suggestive of a global slowdown in in late Q2 after a more robust Q1. Of note, industrial output has been very weak in Germany and France as of May, as core Europe's industrial complex struggles against China's supply overhang. We foresee EUR/USD staying largely in the 1.05-1.08 range in H2 2024 (i.e., on the weak side of the 1.10 median of the past 10 years).