EUR/GBP’s recovery towards around 0.8450 appears to be stalling as France faces a hung parliament.

• EUR/GBP lacks the strength to extend its recovery above 0.8450 as France faces political uncertainty.
• ECB’s Knot supports holding interest rates steady in July, but is open to September meeting.
• Pound Sterling holds firm as Keir Starmer’s UK victory brings political stability.

The EUR/GBP pair is struggling to extend the recovery above the immediate resistance of 0.8450 in the early European session on Tuesday. The upside in the cross seems to have been limited by political uncertainty in France as the Left, also known as the Popular Front of the Left, led by Jean-Luc Mélenchon, unexpectedly gained the upper hand with the centrist alliance of President Emmanuel Macron and the far-right National Rally led by Marine Le Pen as runners-up.

Market participants expect the Central Alliance to join forces with the Left to form a coalition government, which will involve significant negotiations over the allocation of new ministers. Meanwhile, fears of a French debt crisis have eased as the far right failed to secure an absolute majority, which was expected to have favoured expansionary fiscal measures.

On the monetary policy front, the debate over whether the European Central Bank (ECB) will deliver subsequent rate cuts is gaining traction. ECB officials are scheduled to meet on July 18. On Monday, ECB policymaker and Dutch central bank chief Klaas Knot said in an interview with Handelsblatt: “I don’t see a case for another rate cut in July.” However, he said he is comfortable with market expectations for more rate cuts this year and is open to the September meeting.

In the UK region, uncertainty over the Bank of England’s (BoE) decision to start cutting interest rates from the August meeting has deepened. On Monday, BoE policymaker Jonathan Haskel supported leaving interest rates unchanged as long as price pressures remain firm in the labour market. UK wage growth is significantly higher than needed to reduce services inflation.

Meanwhile, the overall attractiveness of the British Pound remains strong against the Euro. The outright victory of Keir Starmer’s Labour Party against Rishi Sunak’s Conservative Party in the UK parliamentary elections has brought political stability to the economy, which is favourable for the economy’s financial markets.