Euro & Pound Rise, Dollar Falls Ahead Of U.S. Non-Farm Payrolls Data

The UK Labour Party is set to win a much-anticipated landslide victory in the general election. GBP/USD remains optimistic around 1.2770, with FTSE futures pointing to a positive open today.

With the election behind us – with more political uncertainty and hopefully less scandal – a Labour win is seen as a net positive for the pound and UK stocks. GBP/USD fell from around 1.50 before Brexit to almost parity at the height of Conservative disappointment over the Liz Truss mini-budget crisis, and the change in government has raised hopes that at least some of the losses can be reversed. In equities, small and mid-cap stocks are expected to outperform the FTSE 100 – which is more exposed to global economic dynamics due to its heavy concentration in energy and mining stocks. But both will benefit from the Bank of England’s (BOE) upcoming rate cut, in addition to other major central banks’ rate cuts at the end of the year. The FTSE 100 rose 0.86% yesterday, fueled by Labour’s win, and should comfortably break above its 50-day moving average before the week ends.

Things are looking better in France, too, from a market perspective. The latest polls suggest Marine Le Pen’s National Rally could fall “far short” of a majority in the second and final round of legislative elections this weekend. The party is expected to win between 190 and 250 seats out of 577, which would be well short of the 289 majority needed to pass bills comfortably. As a result, the French will most likely not see the tax cuts Le Pen promised, and investors will hopefully not see French debt levels explode irresponsibly after this messy “snap election.” Investors are now rushing to buy back French assets and the euro at a discount to avoid missing out on the post-election rally next Monday. The German-French 10-year yield spread has fallen below 70 from last week’s high of 86, and the CAC 40 jumped above its 200-day moving average yesterday and is testing an important Fibonacci level to the upside before the week ends. The index is still well below the 8,000 mark where Macron announced the snap election and could shake off election fears with a further recovery, but in the medium term, the hung government will prevent France from pushing forward with any reforms: this is positive if unsustainable tax cuts are taken into account, but it is not necessarily positive for long-term growth as other reforms will also be hindered. In any case, EUR/USD extended its gains this morning, breaking above 1.0820, and given the FOMO of the euro’s rebound after the election, the euro could rise further before the week ends.

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