GBP/EUR exchange rate flatlines as Labour government announced
The pound euro (GBP/EUR) exchange rate is trending in a narrow range today following a landslide victory for the Labour party in Britain. As the outcome of the election had been widely anticipated, the impact of the event on the currency market is less than it may have been otherwise.
At the time of writing, GBP/EUR is trading at €1.1813, having climbed minutely in the past 24 hours.
Pound (GBP) retains strength as Keir Starmer to replace Sunak
The pound (GBP) is trading broadly sideways today, despite soaring against the US dollar. Traders and the public are aware that the incoming Labour government will have many issues to address, economic stability not least among them. The pressure will be on number ten to deliver on election promises to end an era of ‘Tory chaos’.
With such a significant increase in Labour constituencies, the new government will have a strong degree of support in the House of Commons, but will have to work to address public concern surrounding international conflict and its implications: geopolitical tensions are unlikely to abate as Keir Starmer takes up leadership of the country.
In the near term, the change in UK government represents growth potential for the pound. Paul Dales, Chief UK Economist at Capital Economics observes:
‘The policies of the new Labour government generate some upsides to our GDP, inflation and interest rate forecasts. The stability of the pound overnight is no surprise as a Labour win was already priced into the markets.’
Ahead of the election, analysts speculated that expansionary fiscal policies could boost price pressures, necessitating a higher-for-longer interest rate stance from the Bank of England (BoE). The UK’s central bank maintains a hawkish position, with markets pricing in the first interest rate cut in August – just one month ahead of the Federal Reserve.
Euro (EUR) strengthens despite weak domestic data
The euro (EUR) is climbing today despite a glut of disappointing data from across the Eurozone. Industrial production in Germany surprised to the downside, printing at –2.5% for the month of May rather than 0.2% as forecast; subsequently, retail sales in the euro area increased by less than expected.
Analysts from Germany’s Federal Statistical Office noted that industrial production data marked the second time of contraction so far this year, and the steepest decrease since late 2022. Meanwhile, sluggish retail growth in the Eurozone reflected slowing sales of non-food products after a 0.5% rise in April.
Despite the disappointing release, however, some experts are optimistic. ING’s Senior Economist Bert Colijn remarked:
‘While retail volumes are still 3.5% below their post-pandemic peak, these tentative signs of recovery mean that consumer spending is likely to show upside for the rest of the year.
A turnaround has to start somewhere and with real wage growth improving, expectations of stronger sales over the course of this year are not unrealistic. For GDP growth, this means that expectations of somewhat better economic growth on the back of household consumption recovery are still in the cards.’
Also supporting the single currency is likely to be a weakening US dollar, alongside political diplomacy in France. Fears that Marine Le Pen’s far-right party would achieve a majority in government have abated as at least 200 candidates tactically withdrew from Sunday’s legislative elections, led by a coalition between French President Emmanuel Macron’s centrist alliance and the left-wing.
GBP/EUR forecast: US data to influence exchange rate?
This afternoon, the pound euro exchange rate could trade according to the release of key data from the US.
Given the strong negative correlation between the euro and the US dollar, tailwinds in ‘Greenback’ exchange rates prompted by a reduction in US jobless claims could depress the single currency. Such an occurence may consequently buoy GBP/EUR.
On the other hand, the euro may remain strong amidst recovering retail sales and easing political jitters. Moreover, predictions that the European Central Bank (ECB) will cut interest rates on July 18 have been dialled back as disinflation in the Eurozone appears to have stalled.
