Pound weakens vs surging euro as politics in focus

By Lucy Raitano

LONDON, July 19The British pound rose against a broadly struggling dollar but fell against a stronger euro on Tuesday as latest economic data suggested the cost-of-living squeeze had not yet hit demand for staff in the UK.

Data showed Britain’s unemployment rate holding at 3.8% in the three months to May while the number of people in work rose by the most since the middle of 2021 .

Sterling GBP=D3 was up half a percent at $1.20120 against the dollar, but down 0.44% against the euro at 85.245 pence EURGBP=D3.

The drop against the euro is due to that currency’s strength. It rose to its highest against the dollar EUR=EBS in almost two weeks on Tuesday on news that European Central Bank (ECB) policymakers would discuss whether to raise interest rates by 25 or 50 points at their meeting on Thursday .

“We’re seeing some continuation of dollar downside that we saw on Friday and Monday, and equally today we’re seeing some idiosyncratic euro upside, largely on anticipation of the fact that the ECB might hike more than 25 bps,” said Vasileios Gkionakis, EMEA Head of CitiFX G10 Strategy.

As well as relative currency moves, politics is a main factor driving sterling, Gkionakis said.

The race to replace Boris Johnson as British Prime Minister has narrowed to four candidates, led by frontrunners Rishi Sunak and Penny Mordaunt .

“Her (Mordaunt’s) win would actually represent a shift in the respect of tighter fiscal policy which is going to allow the economy to grow in a more sustainable manner,” said Gkionakis, adding that Sunak represents a continuation of the status quo.

The Bank of England (BoE) is struggling against soaring inflation and a cost-of-living crisis, having raised interest rates five times since December as it has tried to halt a surge in inflation from becoming embedded in the economy.

With diverging approaches to fiscal policy, whoever becomes the next prime minister could affect the trajectory of future fiscal policy, although a top central bank official pushed back against this .

“Fiscal support is going to imply that BoE will have to tighten monetary policy a bit … aggressively,” said Gkionakis.

“A win by Mordaunt could sort of be a game changer for sterling, not so much against the dollar but against other currencies.”

Graphic: World FX rates in 2022

Graphic: Trade-weighted sterling since Brexit vote

(Reporting by Lucy Raitano; Editing by Bradley Perrett)


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