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GBP/USD, EUR/USD Forecast: Two trades to watch

Article By: ,  Senior Market Analyst
July 4, 2024 9:43 AM

GBP/USD rises on General Election day

  • Labour is expected to win by a comfortable majority
  • No dramatic change in fiscal position is expected
  • US stock markets closed for Independence Day
  • GBP/USD trades at a 3-week high

GBP/USD is rising, trading at a three-week high, as the UK heads to the polls as the US stock markets are closed in observance of Independence Day

The UK general election is expected to result in a change of government, with Labour forecast to win by a comfortable majority.

What could a Labour win mean for the UK economy?

Weighing up the Labour Party manifesto, we are not expecting dramatic changes to the UK fiscal position. Labour’s planned spending increase is in the region of £9 billion funded by around £9 million in tax increases. However, in the context of a £3 trillion economy, this is modest.

Meanwhile, UK growth is anemic and is expected to remain that way, with nothing in the manifesto really pointing to strong growth. On a global scale, the economy could benefit from more stability from the centre-left government, especially when compared to other countries' political positions.

The Bank of England will examine these figures and not expect them to change its inflation and growth outlook or future path for interest rates. However, more will become clear when Labour unveils its Autumn Budget later this year.

The pound could benefit modestly from the prospect of increased stability. However, the BoE path for interest rates could remain the larger driving force.

Meanwhile, the US dollar is likely to see low volumes due to the US public holiday.

The USD has fallen sharply in recent sessions, falling to a three-week low versus its major peers after soft data supports the view that the Fed could start to cut interest rates sooner

GBP/USD forecast – technical analysis

GBP/USD has recovered from the 1.26 June low, rising above 1.27 resistance to a peak of 1.2775. Buyers, supported by the RSI above 50, will look to extend gains towards 1.28, the May high, and on towards 1.2893, the 2024 high.

On the flip side, support can be seen at 1.27, with a break below here exposing 1.26 and then the 200 SMA at 1.2560.

EUR/USD rises to a 3-week high, ECB minutes are due

  • USD falls after weak data raises rate cut expectations
  • ECB June meeting minutes are due
  • EUR/USD tests 1.08 resistance

EUR/USD has risen to a three-week high amid a weaker U.S. dollar and ahead of the release of the June ECB minutes.

USD has fallen to a 3-week low versus its major peers after a series of weak data. ISM services PMI contracted at the fastest pace since 2021, and continuous claims rose to the highest level since the same year whilst booking a ninth straight weekly rise, the longest gaining streak since 2018. The data points to the US economy slowing and demand for labour softening.

The minutes from the June FOMC meeting showed that policymakers are seeing a softening in the US economy but still need more evidence before cutting. Federal Reserve chair Jerome Powell's comments earlier in the week were also more dovish.

The market is now pricing in a 69% probability that the Fed could cut rates. In September, down from 56% just a week ago.

Meanwhile, the euro looks ahead to the minutes from the June meeting, during which the central bank cut rates by 25 basis points but failed to commit to further rate cuts.

Recent data suggest that the eurozone economic recovery is starting to slow. Yesterday's services PMI data showed that growth slowed while inflation cooled to 2.5%. Even so, ECB President Christine Lagarde has said that she wants more evidence of inflation cooling before the central bank cuts rates again. The ECB is not expected to cut rates in June but may cut again in September.

EUR/USD forecast – technical analysis

EUR/USD has recovered from 1.0660, the June low, to its current level of 1.08. Should buying momentum persist, bulls will look to retake the 200 SMA at 1.08 and push on towards 1.0915, the June high.

Failure to retake the 200 SMA and 1.08 round number could see sellers push the price back towards 1.07.

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