The British Pound's "Negative Bias" seen Extending Against Euro and Dollar

• Latest Quotes:
• British Pound to Euro exchange rate: 1 GBP = 1.1491 EUR, down 0.17% on the day's open
• Euro to Pound Sterling rate: 1 EUR = 0.8703

Pound to Dollar exchange rate: 1 GBP = 1.2846, up 0.05% on the day

Pound Sterling is looking soft heading into the month-end period as the relief-rally seen at the start of the new week starts to fade.

Overall, pressures remains biased against Sterling and much will depend on politics as minds focus on the looming June 8 General Election.

There were a total of six opinion polls over the weekend, with the Conservatives’ lead over Labour varying widely from 6pts (ORB) to 14pts (ICM), but all showing a wider margin than Friday’s YouGov poll (5pts).

Taking the average of all the new polls, the Conservatives are 10pts ahead.

According to the Electoral Calculus model, this would translate into a majority of 81 seats.

“Markets still appear to be priced for a larger majority than this, with bookmakers’ prices putting the majority at 109, thought his has also fallen sharply from 161 less than a month ago,” says Adam Cole, Head of G10 FX Strategy at RBC Capital Markets.

“While this implied majority is still trending lower, we retain a negative bias on GBP,” adds Cole.

JP Morgan have meanwhile warned that the only guarantee to be given on the outlook for the UK currency is that volatility is likely and even were the Conservatives to gain a big majority it is no guarantee of a recovery in the currency.

"GBP should be relatively insensitive to the size of a Tory majority assuming that it’s north of 30-40 seats. We do not expect any real relief rally in GBP on a Conservative victory as Brexit negotiations are due to commence shortly after the election and investors will be wary of the headline risk that will accompany these,” says strategist Paul Meggyesi at JP Morgan in London.

However, analysts at the world's largest foreign exchange dealer, Citi, believe the Conservatives will see their lead extend once more.

This has them more bullish on the Pound, particularly against the Dollar in the near-term.

“We expect the Conservative Party may win overwhelming election victory, which will likely support GBP,” say Citi in a briefing to clients dated May 30. "We expect the Conservative Party would win 104~190 seats in the coming election. Overwhelming victory would help anti-Euro group to fight for more advantageous treaties in the negotiation with Europe Union.”

“The Conservative Party may win in the general election, which may smooth Brexit process and underpin GBP. For the coming 0-3 months, GBP may rise to 1.33.”

However, Citi are forecasting the GBP/USD to fall back to 1.26 in the 6-12 month timeframe.

Concerning this week's outlook, our own technical forecasts for the GBP/EUR exchange rate envisage the near-term relief bounce ultimately fading and s heavy tone to persist through the turn of the month.

However, a lot will of course also depend on the Euro’s performance this week. With this in mind we will be watching a key data release.

Euro Faces Inflation Test

Whether or not the Pound is able to continue its recovery against the Euro over coming days could well be decided by a key data release out of Europe in the mid-week session.

Wednesday, May 31 see the release of Eurozone inflation data; if the data beats expectations we would expect a pop higher in the shared-currency.

Markets are forecasting a reading of 1.5%, down from the previous month’s 1.9%.

Inflation is arguably the most important data release to consider when it comes to the Euro.

The idea that the European Central Bank (ECB) will soon start raising interest rates is largely predicated on the assumption that Eurozone inflation is rising again.

Higher interest rates tend to lead to a stronger currency.

“The combined effect of Easter related price rises dropping out of the index and falling petrol pump and home heating oil prices should combine to push euro area inflation lower in May,” says Cole.

As a result, RBC Capital expect the headline rate to fall back to 1.6% y/y from April’s 1.9%.

If correct, this outcome should weigh on the Euro.

Closely watched this month, however, will be the evolution of core inflation, which jumped to 1.2% y/y last month from 0.7% y/y previously.

Core inflation is arguably more important as it reflects wage pressures as one-off drivers such as fuel rises are stripped out.

“We think that around half of that rise can be attributed to those categories of the inflation basket most impacted by the timing of Easter. With that effect removed, we would expect core inflation to fall back to 0.9–1.0% this month, approximately the level at which it has held for most of the last two years,” says Cole.

Again, if correct we would expect the Euro to suffer mid-week.