French politics, UK macro data and possible GBP/EUR downside

The GBP/EUR cross is at year-highs but continues to struggle to breach the 1.20 mark, as it did on a number of occasions in the second half of 2016. Sterling has been buoyed by British Prime Minister Theresa May’s call for early general elections on 8th June while the euro remains in reasonably narrow trading ranges as we head into Sunday’s French presidential election first round.

With four presidential candidates polling between 18.5% and 23.5%, it is still a close call (see Figure 1). But I am sticking to my core scenario that independent centre-left candidate Emmanuel Macron will fill one of the top two spots to make it to the 7th May run-off, which I my view would be welcomed by French financial markets and the euro even if markets remain jittery over the next fortnight (see The Ultimate Guide to the 2017 French Elections, Part IV, 13 April 2017).

At the same time, the ever-changing political scene in the UK can do little near-term to avert the headwinds to GDP growth stemming from falling real wages and retail sales. With this in mind, I see the risk to GBP/EUR biased to the downside in coming weeks, particularly if both Macron and Republican candidate François Fillon earn their place in the second round.

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