Pound euro (GBP/EUR) exchange rate soars, dovish ECB weighs on single currency

GBP/EUR exchange rate shoots upward as new week begins

The pound euro (GBP/EUR) exchange rate rocketed as the weekend drew to a close, with euro (EUR) investors despondent over central bank policy and spooked by the announcement of a snap election in France. A degree of volatility in the market is supporting the pound (GBP) today in the absence of any major economic data.

At the time of writing, GBP/EUR is trading at €1.1823, having climbed by more than 0.4% in the past 24 hours.

Euro (EUR) sinks as political uncertainty undermines investor confidence

The euro is tumbling against the majority of its peers today as multiple headwinds weigh upon the currency.

The comparatively dovish stance of the European Central Bank (ECB) is a cause for bearish sentiment, as it became the second major economy to cut interest rates last week following the Bank of Canada (BoC)’s decision on Wednesday.

Also pressuring EUR today is the unexpected announcement from French President Emmanuel Macron over the weekend that the country will hold a general election. Legislative elections will be held on June 30 and July 7, according to the President, who decided to call the vote following gains amongst far-right political parties across the European Union.

Macron told the public via a post on X: ‘I have confidence in the ability of the French people to make the fairest choice for themselves and for future generations. My only ambition is to be useful to our country that I love so much.’

His reassurances failed to prevent volatility in the euro, however, as the prospect of a potential political upheaval threatens stability in the European currency market.

Further preventing gains for the single currency may be strength in the US dollar (USD), with which the euro has a strong negative correlation. Lingering USD tailwinds following last week’s impressive non-farm payrolls release continue to support the ‘greenback’ today, alongside relatively bearish market sentiment.

Pound (GBP) trades mixed as market mood sours

The pound is struggling for direction today as a lack of significant UK data leaves the currency to trade upon external factors.

Cautious market sentiment lends some support to exchange rates where Sterling is paired against a risk-sensitive currency but depresses GBP against safe-haven peers including the US dollar. Against the euro, the pound enjoys tailwinds.

Traders are looking ahead to tomorrow’s employment report for a clue as to the state of Britain’s economy and the likely actions of the Bank of England (BoE). Policymakers are likely to focus upon UK wages as a driver of service inflation – if salaries didn’t climb in the three months to April, the BoE may be less inclined to maintain restrictive monetary policy ahead.

Reduced inflationary pressures will likely come as a relief; but if the UK’s central bank seems likely to moderate its hawkish monetary policy stance, GBP could face headwinds. While the Federal reserve continues to favour restrictive interest rates, a pivot from the BoE towards looser monetary policy will cast the UK bank in a dovish light.

Nevertheless, the Bank of England remains committed to silence until after the upcoming UK election – making it harder for markets to predict policymakers’ attitude. Markets currently seem to be of the opinion that a Labour victory may be positive for the pound, due to the party’s pro-growth agenda.

Analysts at JP Morgan comment: ‘Our economists believe that, given the lack of fiscal space, Labour will likely focus on supply-side reforms… Labour have also sought to reassure businesses by ruling out corporation tax increases.’

GBP/EUR exchange rate forecast: UK jobs report in focus

Into tomorrow, the main market-mover is likely to be the UK’s latest employment release, which will uncover April’s unemployment numbers and average earnings.

The economy is expected to have removed 260.0K jobs in the fourth month of the year; but central bank policymakers are more likely to be focused upon wage data as it feeds into service inflation.

Elsewhere, speeches from the ECB could have some effect upon euro exchange rates, although their content is not expected to be significant. A quiet US docket leaves the ‘greenback’ to trade on market sentiment and other external factors – continuing strength in USD could weigh further upon the single currency.

Olivia Evershed

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