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The pound weakened against the euro on Monday as the single currency surged, driven by investor speculation that France's far-right party might not secure an
outright majority after winning the first round of a national election.
The euro (EURGBP=D3) rose by 0.27% against the pound to 84.97 pence, moving further away from a two-year low of 83.97 pence reached in mid-June. The euro also climbed approximately 0.5% against the dollar.
Marine Le Pen's far-right Rassemblement National (RN) received the most votes in the first round of France's parliamentary election on Sunday, with President Emmanuel Macron's coalition coming in third behind a left-wing alliance.
However, the final result will hinge on days of coalition-building before next weekend's second round of voting. Market analysts noted that RN performed slightly below expectations, and a hung parliament appears the most likely outcome, easing some concerns about the party's high-spending fiscal policies.
"This morning, markets mostly breathe a small sigh of relief as Rassemblement National did not get as much support as some polls had suggested," said Bas van Geffen, senior macro strategist at Rabobank.
Sterling rose 0.24% against the U.S. dollar (GBP=D3) to $1.2676 as the euro's gains weighed on the greenback.
The pound has remained relatively stable since the start of the year and is one of the best performers against the dollar in 2024.
Persistent services and wage inflation in Britain has led investors to delay their expectations for Bank of England rate cuts, with traders now predicting the first reduction could occur in August or September.
Analysts have suggested that expectations of a significant Labour Party victory in Thursday's election, which could bring stability to UK politics, have likely provided some support to British assets, although the impact has been modest.
"The chances of the election result deviating the Bank of England policy path are very low," said Francesco Pesole, currency strategist at ING.
"The pound should continue to rely on external drivers - both in EU politics and US macro - and key domestic data releases."