British Pound to Rise Further Against Euro Ahead of French Election Says MUFG

The British pound is likely to continue trending higher against the euro ahead of the French election and could reach two-year highs or more in the weeks ahead, according to analysts at MUFG.

The euro strengthened late Monday afternoon, as EUR/GBP was quoted at 0.8451.

"We expect the GBP to strengthen further against the EUR ahead of the French parliamentary elections resulting in the EUR/GBP pair moving close to support between 0.8250 and 0.8350," the analysts wrote in a Monday note to clients.

EUR/GBP fell below an important technical support at 0.8500 after French President Emmanuel Macron called a snap general election for June 30 last Monday, bringing previous lows - including April 2022's near 0.8250 and August 2022's around 0.8340 - into view.

This unraveling is likely to be followed by further declines as the investors price a higher political risk premium into the euro ahead of the French ballot and this week's event risks in the UK are unlikely to reverse that trend, MUFG analysts say.

Sterling will be sensitive on Wednesday to whether UK services inflation eases from the 6% YoY rate seen in April as this will be instrumental in determining the Bank of England policy stance on Thursday and thereafter, MUFG says.

The consensus forecast is for a YoY Core CPI reading of 3.5%, down from the previous 3.9%, according to data compiled by Investing.com on Bloomberg.

"The release of the UK CPI report for May would have to be much weaker than expected and/or the BoE send a stronger signal that they are planning to cut rates in August in order to trigger a reversal of the current trend," the MUFG analysts said.