Pound To Euro Rate Hits 1.19

European currencies failed to hold gains on Thursday and posted fresh losses on Friday, especially with fragile risk conditions as European equities under-performed relative to Wall Street.

The Euro remained firmly on the defensive amid political concerns with a particular focus on the French bond market.

The Pound to Euro (GBP/EUR) exchange rate advanced to fresh 22-month highs at around 1.19 amid Euro vulnerability.

According to Credit Agricole; “While we recognise that some negatives are already in the price of EUR/GBP, we maintain our bearish outlook on the pair, targeting a return to 0.84 in the coming months.” (1.1905 for GBP/EUR).

The dollar dipped after the producer prices data on Thursday amid increased hopes for a Fed rate cut in September, but it secured fresh support later in the session with net gains against European currencies.

In this environment, the Pound to Dollar (GBP/USD) exchange rate lost ground with a retreat to near 1.2720.

Overall confidence surrounding the Euro area dipped again with a particular focus on the French political situation ahead of snap parliamentary elections at the end of June.

French bonds (OATs) were sold again, especially in relation to German Bonds (Bunds).

MUFG commented; “The OAT/Bund spread is now at 73bps, breaking above the energy-crisis and global pandemic highs to reach the widest spread since the 2017 French presidential elections when the financial market first feared the risk of a Le Pen presidency. It didn’t happen then, nor in 2022 but the markets now rightly fear it could be ‘third time lucky’!”

ING also noted the impact of political stresses; “We’re not French political experts, but it looks like the euro is taking another leg lower in early Europe today on news that the French parties of the Left are getting their act together to form a coalition and only run one candidate per district between them. This rare cooperation of the Left stands to suck support from President Macron’s party further.”

It added; “With opinion polls taking such a toll on the euro and presumably more polls due this weekend, we expect investors will want to manage their euro exposure carefully.”

The bank does not expect near-term relief during the French campaign; “It is going to be a long month for the euro. And next week could see the European Commission place France in an excessive deficit procedure.”

The Pound has been dominated by global developments this week, although there was a weaker housing survey and markets will continue to monitor Bank of England expectations.

The RICS housing survey weakened to -17% for June from -7% previously and compared with expectations of a further small recovery to -5%.

According to the survey; “This appears to be linked to the recent scaling back in expectations around the degree of monetary policy loosening likely to be pushed through by the Bank of England during the second half this year”

It added; “With respect to the near-term outlook for prices at the national level, expectations suggest that some further downward pressure could be seen in the coming three-months.”

There was still an element of optimism; “Nevertheless, respondents still foresee a modest recovery in residential sales volumes getting back on track over the months ahead.”

The latest BoE survey reported a decline in 1-year inflation expectations to 2.8% from 3.0%.

UK economic developments next week will be important with the BoE policy decision on Thursday.

Ahead of the announcement the latest inflation data will be released on Wednesday.

Markets do not expect a rate cut at this month’s policy meeting, but guidance from the BoE will be watched closely.

Weaker-than-expected inflation data would also increase speculation that the BoE will cut interest rates at the August meeting and potentially undermine the Pound.