Sterling touched a three-week high against the euro after the single European currency dropped following the shock French election result which gave the hard-left the most seats in parliament and risks leaving the country in a political gridlock.
The pound (GBPEUR=X) rose 0.1% against the euro, leaving the euro at €1.1824 on Monday — its lowest since 14 June.
The Euro’s sell-off is indicative of the market’s initial unease with Sunday’s election in France, which could result in a hung parliament for in the eurozone’s second-largest economy.
French bonds also suffered a sell-off, pushing government borrowing costs higher, while the CAC 40 (^FCHI) stock exchange in Paris was the worst performer among its European peers this Monday.
“We think investors will probably judge that the election has avoided the worst possible outcomes: a majority RN or NFP government. But things still don’t look good for France,” Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, said.
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The pound has been pushing higher against the euro since Thursday, following the Labour party’s win in the UK general election, with sterling strengthening 0.5% against the single European currency.
Labour’s victory with an absolute majority has brought some political stability to the economy, but analysts are more concerned with outside risks that might hit the pound.
“We doubt that fiscal prospects will have an impact on the pound just yet, while developments in French politics, US macro and Bank of England interest rate expectations will remain the largest sterling drivers,” ING strategist Francesco Pesole said.
The pound was also higher against the dollar (GBPUSD=X), trading at $1.2819 after the monthly non-farm payrolls report showed the US economy generated jobs at a healthy rate in June. But signs of weakness are starting to emerge, which investors took as a sign the Federal Reserve will be more likely to cut rates sooner rather than later.
Fed officials have highlighted that they want to see inflation drop for months before cutting interest rates. However, Fed chair Jerome Powell said last week that an unexpected weakness in the labour market could force policymakers to react on interest rates sooner.
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Markets are currently seeing a 74% chance of a cut in September, according to the CME FedWatch tool, and pricing in potentially two rate cuts this year. At the beginning of the week, the September rate cut probability stood at around 64%.
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