The pound surged to a three-week high against the euro on Monday following a surprising French election result that saw the hard-left securing the most parliamentary
seats, potentially leading to a political stalemate in France.
Sterling (GBPEUR=X) appreciated by 0.1% against the euro, reaching €1.1824 — its highest level since June 14.
The euro's decline reflects market concerns about the French election, which could result in a hung parliament for the eurozone's second-largest economy.
French bonds experienced a sell-off, increasing government borrowing costs, while the CAC 40 (^FCHI) stock exchange in Paris performed the worst among its European counterparts on Monday.
Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics, commented, "Investors might feel relieved that the election avoided the worst outcomes of a majority RN or NFP government, but the outlook for France remains uncertain."
Since Thursday, the pound has been rising against the euro, boosted by the Labour party's victory in the UK general election, which provided some political stability. Sterling has strengthened 0.5% against the euro since then.
Despite the political stability, analysts remain cautious about external risks affecting the pound. Francesco Pesole, a strategist at ING, stated, "We doubt fiscal prospects will impact the pound immediately. French politics, US macroeconomic developments, and Bank of England interest rate expectations will remain the main drivers for sterling."
The pound also gained against the dollar (GBPUSD=X), trading at $1.2819. This followed the US non-farm payrolls report, which indicated healthy job creation in June but also signs of emerging weakness. Investors interpreted this as a sign that the Federal Reserve might cut rates sooner rather than later.
Fed officials have indicated they want to see sustained inflation reduction before cutting interest rates. However, Fed Chair Jerome Powell noted last week that unexpected weakness in the labor market could prompt earlier rate cuts.
According to the CME FedWatch tool, markets are currently seeing a 74% chance of a rate cut in September, with the possibility of two rate cuts this year. At the beginning of the week, the September rate cut probability was around 64%.