Sterling Targets $1.27 Vs Dollar and Holds €1.18 handle Vs Euro

Sterling falls under $1.27 handle vs Dollar

The Pound was mixed as we opened the morning trading session, with GBP/EUR holding gains against the Euro, continuing to target the 1.1850 level, but Cable (GBP/USD) fell under the $1.27 handle.

Britain's pound has bounced ahead of an expected landslide election win for the opposition Labour Party but the currency's future depends on the next government convincing skittish investors that its plans to fix a stagnant economy are credible. On a trade-weighted basis Sterling has returned to levels not seen since 2016's Brexit vote as currency traders bet on a long era of currency volatility driven by tumultuous politics under the ruling Conservative party coming to an end. If Labour wins on July 4, the left-of-centre government will need to keep investors' trust while tackling economic challenges the Conservatives have not solved, more than 20 economists and former government officials said.

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EUR: Rehn gives a nudge to market doves

EUR/USD is back around $1.07 following a soft session for risk sentiment yesterday. Markets are waiting for the approaching French election on Sunday. A poll of polls by Bloomberg published yesterday sees a widening of Marine Le Pen National Rally’s lead to over 35% with the leftist New Popular Front alliance stable at 28%. Markets appear to be making peace with the prospect of a National Rally victory and parliamentary gridlock, especially after Le Pen’s party attempted to ease market concerns on the fiscal side.

In other eurozone news, ECB official Olli Rehn sounded relatively dovish (he is considered a generally neutral figure) in an interview this morning, saying that market pricing for two more rate cuts in 2024 looked “reasonable”. Markets have been revamping rate cut bets in the eurozone over the past two weeks, with the December OIS contract back at pricing in 45bp of easing after as little as 30bp on 10 June.

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USD Slips as the S&P 500 Rallies to a Record High

The US Dollar Index, which gauges the USD's valuation against a basket of six major currencies, registered small gains on Tuesday as the mixed action in Wall Street continued. The Dow Jones Industrial Average lost 0.76% on the day, while the Nasdaq Composite gained more than 1%. Early Wednesday, the USD Index clings to modest gains above 105.50 and US stock index futures trade marginally higher.

Today is a quiet day in markets ahead of the busy latter part of the week, which also includes the first Biden-Trump debate tomorrow. Data releases this week have so far failed to convey any compelling story in US macro: consumer confidence was a bit weaker than expected yesterday, but stable from May, and a soft Richmond Fed Manufacturing index was in line with an ISM manufacturing in contraction territory. Today’s data calendar is light in the US, and there are no scheduled Fed speakers. Yesterday, Michelle Bowman’s call for no cuts in 2024 confirmed her position as the most hawkish member of the FOMC.

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