EUR/GBP trades lower as French election risks and weak German data weigh

• EUR/GBP loses ground on the risks to the EU of a far-right victory in Sunday’s French elections. 
• Weak German IFO data further weighs whilst the Pound gains some support from firm Retail Sales data. 
• Pound Sterling manages to exorcize some of the dovishness from the BoE’s June meeting. 

EUR/GBP is trading lower in the 0.8440s on Tuesday as the Euro (EUR) loses ground due to rising political risk premia amid concerns about the outcome of the French-election, whilst the Pound Sterling (GBP) finds support after recent UK Retail Sales data beat forecasts, easing expectations that the Bank of England (BoE) go ahead with interest-rate cuts in August, as is widely expected.

EUR/GBP falls as French Election threatens European project

The Euro is depreciating ahead of the French elections on Sunday June 30 when the French will vote in their next parliament. At the moment the far-right National Rally (RN) is in front with 34% of the vote and is projected to win 260 seats in the National Assembly, just short of the 289 needed for a clear majority to rule, according to Politico. 

If National Rally wins the election it will be a massive setback for the European Union (EU), shake the foundations of the world order, and drive a wedge into the western alliance at the heart of NATO. 

“An RN government would therefore be a dagger to the belly of Western as well as European unity. It would threaten Russian infiltration of the French — and therefore Western — intelligence services,” says John Lichfield, a contributor to Politico. 

That said, at the moment the RN does not look like it will quite get a clear majority, resulting in what Lichfield calls an “utterly blocked parliament.”

Underpar German data further weighs

As far as macroeconomic data is concerned, the headline German IFO Business Climate Index which fell to 88.6 in June from 89.3 in May, coming in below the market expectation of 89.7. The Current Assessment Index, meanwhile, remained unchanged at 88.3, while the Expectations Index dropped to 89.0 from 90.4. This weaker German data puts more pressure on the Euro, further dragging the EUR/GBP cross lower.

Traders will be watching preliminary inflation data for June in several major European economies, including France, Spain, and Italy, published on Friday, for hints of the trajectory for interest rates in Europe. ¡

At its meeting in June, the European Central Bank (ECB) cut its key policy interest rate by 0.25% to 4.25%, however, further rate cuts are in the balance. Lower inflation would increase expectations of the ECB following up with further cuts and weigh on the Euro. Lower interest rates are negative for a currency because they attract less foreign capital inflows. 

Pound exorcizes some of BoE-meeting’s dovishness

The Pound Sterling, meanwhile, finds some support going into the new week after UK Retail Sales data out on Friday beat expectations and reduced bets the BoE will cut interest rates at its meeting in August. 

Retail Sales in the UK soared 2.9% month-over-month in May, recovering from an upwardly revised 1.8% decline in April and much higher than forecasts of a 1.5% gain. It was the largest  increase in four months, with sales at non-food stores rising 3.5%, the most since April 2021, according to Trading Economics.

The data popped some of the optimism that had expanded following the BoE’s June policy meeting. Although the BoE’s board of governors voted to keep its key policy interest rate unchanged at 5.25%, there were hints in the accompanying statement that the decision was “finely balanced” and might have swung either way. Markets took this as a sign that the BoE was closer to pressing the trigger on cutting interest rates than previously thought. 

The meeting also followed the release of the latest Consumer Price Index (CPI) data for the UK, which showed headline inflation cooling to only 2.0% in May, from 2.3% in April and the lowest since July 2021. Although core inflation remained stubbornly elevated at 3.5%, the fall in the headline rate brought it into line with the Bank of England’s target, indicating inflation might be near a level where the BoE would see fit to reduce interest rates.