The results of the first round already indicated that the worst-case scenarios for the markets related to the parliamentary elections in France would not materialize. The second round confirmed that each faction is far from an absolute majority, and compromises that soften electoral promises will be necessary. The reduction in the political risk premium and weak economic data from the US strengthened most currencies against the dollar. The recent MPC meeting also helped the zloty.
Key points:
- The political risk premium in Europe is falling, but uncertainty persists after the second round of elections in France.
- The dollar is experiencing a sell-off against all other currencies as economic data disappoint and risk sentiment improves.
- Speculation is growing that Kamala Harris may replace Joe Biden in the US presidential race.
- The Labour Party scores a landslide victory in the UK elections. No reaction from the pound.
- The NBP revises the inflation forecast for 2025 up by 1.65 pp to 5.25%.
The main source of investor concern – an absolute majority of the left (NFP) or the far right (RN) – posing a threat related to the fiscal policy revolution outlined in the pre-election promises, will not materialize. The most significant theme of the second round is the surprising victory of the left, accompanied by the most fragmented parliament in modern French history. It seems that investors’ optimism related to the defeat of the National Rally is balanced by concerns about the victory of the New People’s Front. As a result, the euro’s exchange rate has not changed significantly since Friday’s market close but is undoubtedly higher than right after the election announcement. The reduction in the political risk premium and weak economic data from the US have caused almost all major world currencies to strengthen against the US dollar.
Political uncertainty regarding Biden’s candidacy for the US presidency does not have a significant impact on the market for now, so attention will now focus on political discussions concerning the suspended French parliament, where each side is far from having the number of seats needed for independent governance. Economists will focus not on the recently observed slowdown in the US economy but on inflation, as the June report will be published on Thursday (11.07). They optimistically predict that the core price dynamics will increase by 0.2% on a monthly basis, signaling a return to normal momentum and the Federal Reserve’s inflation target, allowing the bank to start cutting interest rates in September.
PLN
Last week’s MPC meeting brought some surprises and helped the zloty maintain its strength. The new inflation forecasts showed a significant upward revision for 2025 – the midpoint was raised by 1.65 pp to 5.25%. This is related to the issue of regulated energy prices, which are expected to double – not only in July but also in January. The picture outlined by the NBP seems overly pessimistic to us.
The forecast revision also provides the backdrop for the hawkish statements of President Adam Glapiński, who dispelled any doubts about interest rate cuts and signaled that they may remain unchanged until early 2026. The degree of his hawkishness is surprising. It is possible that this aimed to balance the risk to inflation expectations resulting from rising regulated prices. At the same time, it seems that this approach is currently too cautious and increasingly difficult to justify in the face of changing economic conditions. He did not convince us with his words (similarly to the market, which reduced the priced-in total rate cuts by only 15 bp by the end of the year). However, we are closely monitoring the situation, especially in the context of inflation expectations and labor market tightness.
If the NBP keeps interest rates unchanged next year while major banks are loosening monetary policy, even our EUR/PLN forecast of 4.20 may prove too pessimistic for the zloty. Besides Monday’s (08.07) inflation report from the NBP, there will be no other significant domestic news this week, so attention will likely focus on foreign events.
EUR
The euro has strengthened throughout the week in response to weaker US labor market data and hope for a suspended parliament in France, which would not give full power to either the right or the left. The results confirmed expectations, but the better-than-expected performance of the leftist New People’s Front may limit the euro’s appreciation in the short term.
Data from the bloc had little impact on the common currency in recent days. Slightly more persistent than expected core inflation, which stabilized at 2.9%, does not significantly change the overall picture – both the market and we expect two ECB rate cuts by the end of the year. The calendar for the eurozone is quite empty this week, so trading in the common currency will largely depend on reactions to political headlines from France and the US inflation report (Thursday 11.07).
USD
It is still too early for the currency market to start pricing in a higher probability of a Trump victory in the November presidential election, so it is driven by signs of weakening economic readings in the US. The NFP (non-farm payrolls) report indicated a slowdown – the unemployment rate rose to 4.1%, previous job creation data were revised down, and wage growth weakened. The data are not yet conclusive, but combined with the expected drop in CPI inflation in June, they may allow the Fed to cut interest rates twice in 2024, starting in September. If this happens, the dollar is expected to give up some of the gains it recorded in the first half of the year by the end of the year.
GBP
The widely expected significant majority of the Labour Party in the parliamentary elections was largely priced in by the markets, so it had no significant impact on the pound’s valuation. It should be noted that the scale of Labour’s victory was magnified by the characteristics of the British electoral system (single-member constituencies) – the party’s overall support (34%) is much lower than the percentage of seats it won (63%).
Attention now returns to the economy – on Thursday (11.07), we will learn a series of data for May, including industrial production and monthly GDP growth. For the first time since the June meeting (20.06), Bank of England policymakers will also speak.
Authors: Enrique Díaz-Alvarez, Matthew Ryan, Roman Ziruk, Itsaso Apezteguia, Michał Jóźwiak – Ebury analysts
