EUR/GBP and GBP/USD: Pound outlook ahead of the UK election

The British pound will be in the spotlight as traders wait for the upcoming UK elections. The EUR/GBP exchange rate rose to 0.8500 this week, 1.20% above its lowest point in June. At the same time, the GBP/USD pair rose by 0.63% to 1/2700 on Wednesday.

UK election ahead

This has been a busy political week in Europe and in the United States. In the US, the focus is on whether Joe Biden will remain as the Democrat's presidential candidate after his debate performance last week. The Supreme Court also ruled in favour of Donald Trump, forcing New York to postpone his sentencing. 

In Europe, France went to an election on Sunday in which the right wing parties won albeit at a lower level than expected. The election has left Emmanuel Macron with diminished power, a move that can affect the economic policies. 

The next big event will be the upcoming election in the UK that pits the Labour Party against the Tories and Nigel Farage’s Reform Party. 

This will be an important election because polls predict that Tories will suffer their biggest defeat in decades. This defeat is justified since the UK economy has been diminished in their 14 years in power. 

The London Stock Exchange (LSE) has continued to underperform some of its European peers. The UK left the European Union, a move that has cost the economy billions of pounds and made it difficult for businesses to operate. 

Further, the manufacturing sector has continued to diminish. For example, the UK has no big automaker while the steel industry has almost collapsed. 

Impact of Labour victory

Therefore, there is a likelihood that the Labour Party will win big in this election. What is unclear is how the policies will affect the economy since its manifesto does not shed light on how it will make Britain competitive again. 

One of the party’s goals is to improve the relations between the UK and the European Union. In this regard, the new government will likely find it difficult because the EU may be reluctant to negotiations. 

The Labour Party’s other economic plans are creating a national wealth fund to invest in jobs, building 1.5 million new homes, and a partnership with businesses. These plans are relatively vague.

Therefore, the GBP/USD and EUR/GBP pairs will likely have a mild reaction to the election unless something big happens.

Instead, the main catalyst for the pairs will be the actions of the Fed and the Bank of England (BoE). The BoE is expected to start cutting interest rates as soon as in July since the UK’s inflation has dropped to its 2% target. 

The Fed, on the other hand, is expected to hold rates steady since inflation has remained above its target at 2.0%. As such, this divergence could, in theory,  push the GBP/USD pair in the medium term.

GBP/USD technical analysis

GBP/USD chart by TradingView

The daily chart shows that the GBP to USD pair has crawled back in the past few days. It has risen from 1.2600 to 1.2700 and crossed the 50-day Exponential Moving Average (EMA).

Most notably, it has formed an inverse head and shoulders pattern, which is a popular bullish sign. It has just moved from the right shoulder of this pattern. Therefore, the pair will likely continue rising as buyers target the next point at 1.2820, the neckline of this pattern. 

EUR/GBP forecast

EURGBP chart by TradingView

The EUR to GBP exchange rate has been in a downward trend in the past few months. It dropped to a low of 0.8400 in June. It has then rebounded and retested the key resistance point at 0.8498, its lowest swing in August 2023 and February 2024. This means that it has formed a break and retest pattern.

Therefore, the EUR/GBP pair will likely continue falling as sellers target last month’s low of 0.8400.