British Pound Softens As Euro Gains Momentum

What’s going on here?

The British pound has softened against the euro, which rose 0.12% to 85.09 pence. Despite this, the euro is still at the weak end of its recent range following May’s performance.

What does this mean?

In May, the British currency strengthened against most major peers due to unexpectedly high services

inflation

, tempering market expectations of a June rate cut by the Bank of England (BoE). Currently, the pound is down 0.07% against the dollar at $1.2784, nearing its two-and-a-half-month peak of $1.2818 reached on Tuesday. A recent BoE survey indicated a significant drop in British businesses’ wage growth expectations, falling to 4.1% in May from 4.6% in April, marking the lowest levels since May 2022. This decline may ease policymakers’ inflation concerns, potentially paving the way for future rate cuts. Market pricing anticipates one or two 25 basis point BoE rate cuts this year, with the first likely in September.

Why should I care?

For markets: Sterling’s shifting landscape.

The British election has had minimal impact on the pound thus far, even though it coincided with hotter-than-expected inflation data. The opposition Labour Party is leading significantly in the polls, and analysts at MUFG suggest that a Labour victory could be positive for the pound due to expected political stability and fiscal spending. Investors should watch for potential shifts in Bank of England rate cut expectations and economic policies under new political leadership.

The bigger picture: Global economic dynamics at play.

The European Central Bank (ECB) policy decision is a key market event, with a rate cut almost certain. Investors will closely monitor ECB President Christine Lagarde’s statements for future monetary policy direction. Analysts also highlight that a Labour-led UK government could address Brexit-related challenges more effectively, potentially reducing trade frictions and improving international relations. This broader economic context is crucial for understanding potential long-term impacts on the British and global economies.