Societe Generale’s Kit Juckes notes that UK political change is generating only modest Sterling (GBP) weakness, with EUR/GBP seen one to two percentage points higher and GBP/USD likely to test 1.30 this summer. He argues that Sterling remains vulnerable due to inflation and the balance of payments, but stresses that US Dollar direction after the latest FOMC meeting and upcoming Personal Consumption Expenditures (PCE) Price Index data will dominate FX trends.

Summer test of 1.30 on Dollar drivers

"The UK is heading for its seventh Prime Minister since the Brexit vote 10 years ago. The FX market is not overreacting so far, and only modest sterling weakness is likely from here, taking EUR/GBP one or two percentage points higher, while GBP/USD is likely to test 1.30 this summer."

"The pound is weaker than it was before Brexit, but "cheapness" is slowly being eroded by inflation. That, together with the balance of payments, leaves the currency vulnerable, but it is the direction of the US dollar that will be the main driver of FX trends in the coming weeks and months."

"Last week's FOMC meeting has changed the mood, and US economic data will determine FX trends for now. This week, that means second-tier real economy data and the PCE deflators."

"Our economics team expects May's core PCE deflator to rise by 0.4% m/m and 3.5% y/y, which would probably send the dollar higher."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)