Sterling strengthens following Labour win, French election outcome

The pound traded at a three-week high against the euro on Monday, after Sunday’s election in France looked likely to result in a hung parliament that raises the risk of political gridlock in the euro zone’s second-largest economy.

In the UK, new Finance Minister Rachel Reeves will pledge on Monday to take “difficult decisions” to drive economic growth, including swift changes to unblock infrastructure and private investment, in her first major speech since Labour won power last week, according to excerpts released by her Treasury department.

Since Labour’s landslide win on Thursday, the pound has strengthened by 0.5 per cent against the euro, leaving the single European currency at 84.54, its lowest since June 14 on Monday.

“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 rate expectations will remain the largest sterling drivers,” ING strategist Francesco Pesole said.

The pound gained 0.4 per cent against the dollar on Friday, after the monthly nonfarm 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.

Sterling , which is the best-performing major currency against the dollar this year, was flat at $1.2809.

The Bank of England meets on Aug 1. Right now, markets are attaching a roughly 63 per cent chance of a rate cut, particularly given how inflation has come down and the economy has not shown any major signs of deterioration.

BoE Monetary Policy Committee member Jonathan Haskel will give a speech later on Monday on inflation that will come under close scrutiny.

“Haskel delivers the first BoE speech since the election was called, and with many expecting a rate cut next month, his speech will be closely watched,” ADM Investor Services global economist Marc Ostwald said.