EUR/GBP declines toward 0.8400 amid uncertainty over French elections

• EUR/GBP is exposed to 0.8400 due to multiple headwinds.
• The Euro weakens as French Macron’s surprise call for a snap election has resulted in political uncertainty.
• UK’s steady wage growth has deepened fears of inflation remaining persistent.

The EUR/GBP pair seems exposed to more downside towards the round-level support of 0.8400. The cross is under pressure amid uncertain Euro’s appeal due to French President Emmanuel Macron’s decision to dissolve parliament and calling for a snap election and firm Pound Sterling amid expectations of the Bank of England (BoE) delaying rate cuts.

French Macron’s unprecedented call for a snap election came after exit polls for Eurozone parliamentary elections indicated that the general public desires a change in administration, resulting in political uncertainty as Marine Le Pen-led-Centrist’s alliance was already expected to suffer a defeat from Jordan Bardella-led-far-right National Rally. Seats won by the far-right at 32%-33% were more than twice the Centralist alliance.

Meanwhile, the Euro struggles to gain ground, albeit the European Central Bank (ECB) is refusing to commit to subsequent rate cuts. Last week, the ECB commenced its rate-cut campaign after reducing the Deposit Facility Rate by 25 basis points (bps) for the first time in five years but hesitate to commit a linear declining path as it worries that progress in inflation towards 2% could pause due to steady wage growth outlook. Currently, financial markets expect that the BoE will deliver only one more rate-cut decision by the year-end.

In the United Kingdom (UK) economy, interest rates appear to remain at their current levels for a longer period as wage growth remains steady despite soft labor demand. The UK labor market report for three months ending April showed that Average Earnings Excluding Bonuses, which is a wage inflation measure, grew in line with estimates and the prior release of 6.0%. Wage growth has been a major driver of service inflation, which has been a barrier for Bank of England (BoE) policymakers to initiate a confident return to policy normalization.

The number of employed individuals decreased consecutively for the fourth time as firms refrained from hiring due to weak household spending. The labor force shrank by 140K workers, lower than the prior release of 177 K. The ILO Unemployment Rate rose to 4.4% from the estimates and the prior release of 4.3%.