France/UK Elections: EUR and GBP post gains as analysts hope for political stability

The US markets are closed today for Independence Day, but markets in Europe are busy as a slew of economic and political events are due to play out over the coming days.

Before we dive into the politics, let’s review the latest economic news. The EUR/USD has made big gains this week off the back of weaker US economic data and an increase in the probability of a September rate cut by the FOMC.

While the Fed’s official position is still for a single rate cut this year, probably in November, futures traders now put the chance of a September cut at 70%. This stems from data showing a significant cooling of the US economy. The US ISM Services PMI fell sharply to 48.8 in June, marking the steepest decline since April 2020. This figure was well below market expectations of 52.5, following a reading of 53.8 in May. The ADP Employment report showed that US private businesses added 150,000 workers to their payrolls in June, the lowest increase in five months. This figure fell short of the expected 160,000 and was below the downwardly revised 157,000 in May.

The likelihood of a rate cut received a further boost last night following the release of the minutes from June’s FOMC meeting. The minutes showed that Fed officials remained wary of lowering rates, but there was general agreement that the labour market—and the wider US economy—was cooling.

Landslide victory predicted in the UK elections

While the economic news from the US has contributed to USD weakness, political events on the other side of the Atlantic have contributed to gains for the GBP/USD and EUR/USD.

The UK goes to the polls today in what is expected to be a landslide victory for the Labour Party. YouGov published their final poll yesterday afternoon, showing that Labour could be on course for the largest parliamentary majority by any UK political party since 1832. The GBP responded with further gains against the USD as investors and traders hoped for a period of political stability after a chaotic few years of Tory rule.

Derek Halpenny, head of FX research at MUFG Bank said:  

“We see the Labour Party winning a large majority in the UK general election on 4th July. We have raised our GBP forecasts in part on better political stability ahead and in part on the signs of a stronger rebound in economic growth than we previously expected. The economic policies put forward by Labour are very cautious and the strategy is clearly to strengthen trust with voters that it can govern and manage the economy. We certainly assume better political stability is on its way with Labour intending to focus on ‘wealth creation”

Centre and left look to keep the far-right shackled in France

With no clear winner from snap elections held in France last week, a second round will occur this Sunday. While no victor emerged from the first round, Marie la Pen’s far-right National Rally (RN) party made big gains, coming away with 33% of the vote. The left-wing New Popular Front took 28%, and Ensemble, President Macron’s centrist coalition, trailed substantially on 21%.

Markets across the EU, and especially in France, have been rocked by the possibility of a far-right, anti-EU government in France. But European markets and the EUR/USD received a boost yesterday as the New Popular Front and Ensemble announced the tactical withdrawal of 200 of their candidates in a coordinated attempt to keep the RN from taking power.

Analysts expect the tactic to work. A new poll conducted by Harris Interactive predicts a hung parliament, with the RN falling well short of a majority.

While a hung parliament is not anyone’s idea of stability, it will certainly do less to stymy EU governance and policy than an RN victory.

So, the GBP looks set for further gains over the coming weeks, especially considering any further weakness in the US economy. However, any US economic weakness may not translate into long-term gains for the EUR/USD, as much will hinge on Sunday’s vote in France and the wider consequences for the EU project.