The British pound remained largely unchanged on Tuesday, slightly down from Monday's one-month peak as investors assessed the new political landscapes in Britain and France following parliamentary elections in both countries.
Sterling held steady against the U.S. dollar at $1.2804, down from Monday's one-month high of $1.2846, with traders also awaiting U.S. Federal Reserve Chair Jerome Powell's testimony later in the day.
The Labour party's landslide victory in Thursday's UK election has promised stability following a volatile period that saw four Conservative Prime Ministers in five years.
The pound is one of the best-performing currencies this year, mainly due to the Bank of England maintaining higher-than-expected interest rates amid persistent wage and services inflation.
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Recent signs of a slowdown in U.S. growth have weighed on the dollar, supporting sterling. Analysts and investors believe hopes for more political stability in the UK have also been beneficial.
Jane Foley, head of FX strategy at Rabobank, was cited by Reuters as commenting on sterling’s recent dynamics:
“On the hope that UK politics can avoid the dramas and uncertainties associated with the Brexit, (Boris) Johnson and (Liz) Truss periods, we expect that GBP can continue its slow grinding recovery”.
Sterling also remained largely flat against the euro, with the eurozone currency trading at 84.49 pence.
The euro has been volatile in recent weeks due to uncertainty surrounding the French parliamentary elections, which concluded on Sunday and resulted in a hung parliament with a surprisingly strong showing for the left.
Analysts cited by Reuters expect further fluctuations in the euro as French parties negotiate to form a government, with the outlook remaining uncertain.
Bank of England (BoE) policymaker Jonathan Haskel said on Monday that he opposes cutting interest rates from their current 16-year high, citing ongoing inflationary pressures in the job market and uncertainty about how rapidly they will fade.
Financial markets currently estimate a roughly 60% chance that the Bank of England will cut interest rates on August 1, for the first time since 2020. However, Haskel maintained his cautious stance against easing monetary policy.
Haskel is the first BoE policymaker to speak since the conclusion of the UK election campaign, which brought a blackout on BoE communications.
ING FX analyst Francesco Pesole commented on Haskel’s remarks, saying they may have helped support sterling in Monday trade, but referred to “more neutral” MPC member Huw Pill for a more balanced view of the BoE’s position:
“Hawkish MPC member Jonathan Haskel was the first to deliver remarks following the Bank of England's quiet period around the election. He unsurprisingly said that he will vote for a hold at his final meeting in August as he highlighted inflation risks stemming from the tight labour market.
That may have helped the pound trade on the strong side for most of the European session yesterday, but it hardly provides an accurate snapshot of the MPC’s consensus. Tomorrow’s speech by Chief Economist Huw Pill, who is a more neutral member, should shed a brighter light on the current BoE stance ahead of key CPI data next week”.
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Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.
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