Currency Note

General election 2017: where do we go from here?

By Paul Redmond June 9th, 2017

sterling slips

We are going to take a leaf out of Jeremy Corbyn’s book and be positive. Hindsight is a wonderful thing, but you do wonder how Theresa May could get it so wrong by calling a general election, and then compound that error by running such a woeful campaign. Despite her protestations, it doesn’t seem likely that she will be around for long. This shouldn’t be a problem in the short term, as the Brexit talks don’t start for two weeks.

But who will be our Prime Minister in the longer term? It isn’t impossible that a Labour-led coalition could get in, but it does seem extremely unlikely. Despite the disastrous result, the Tories still have the largest number of seats in Parliament, but they will still be dependent on the support of others, most likely the Democratic Union Party of Northern Ireland.

Overall, the view here is positive. 48% of people voted to stay in the EU, with 52% voting to leave. However, a significant number of those leavers seem keen to maintain a strong relationship with our neighbours. Extrapolating that into the future, the new government will have to govern by consensus, which should see Tory hardliners marginalised.

GBP: busy day for data but unlikely to move the pound just yet

Overnight we saw sterling suffer as the chances of a hung parliament became more and more likely. Since the division of seats has become clearer it has staged a slight recovery. Market commentators had said that the nightmare scenario was a Labour/SNP coalition which could well have seen a run on the pound.

In the current scenario, it is probable that the middle ground will hold sway which will support sterling. We might not see a huge upsurge in the value of sterling in the short term, but unless something truly extraordinary happens, the downside risks should lie dormant, as least for a while. Call your trader as soon as possible if you want us to help manage your currency risk on this tumultuous day.

On the economic data front, we have a full suite of releases today, including the latest trade balance figures for April, consumer inflation expectations for the second quarter, plus the figures for construction output, manufacturing and industrial production. A pretty busy day all told, but the influence on sterling is likely to be muted in the very short term.

Finally, why not have a read of yesterday’s election blog which looked to the calm that was there before the storm of today.

EUR: positive spin from ECB but continued QE expected

The big talking point in the eurozone yesterday was the European Central Bank meeting. The ECB released a positive spin on its rhetoric at yesterday’s meeting and have increased its forecast for economic growth whilst keeping rates on hold. In addition, they hinted that there would be no further rate cuts.

Draghi and his colleagues raised its growth forecast for the region to 1.9% for 2017, which was an increase of 0.1% whilst stating that it no longer saw risks to growth being skewed to the downside.

However, we saw ECB strike a more dovish tone on inflation as it expects it to be subdued. Ultimately, this means they will be continuing with their quantitative easing measures. The single currency weakened on the back of these comments, as the market was hoping for a change of tone and signal of a tapering of QE.

This morning, in light of the results from the UK general election, we have seen the euro strengthen against the pound.

USD: Trump and the troublesome priest

As the UK was steeped in general election fever and the ECB undertook its June policy meeting, over the pond saw the appearance of James Comey, the former FBI Director who was fired by Trump. Comey is testifying about his interactions with President Trump relating to the investigation into Michael Flynn and Russian interference in the US election.

Trump cited Comey’s handling of the Clinton investigation as the reason for his firing and lawmakers will be interested to find out whether this was in fact the case. The conduct of the President through the process will also be of interest and markets will be looking for signs that Trump has done anything that might warrant his departure from office.

The testimony by Comey reveals Trump put pressure on him to drop enquiries related to an ongoing investigation into Russia’s meddling in the 2016 election. However, it could come down to semantics – many senators were keen to stress that Trump never actually explicitly told him to drop the investigation, though there was an allusion to the line in Shakespeare’s Henry II that reads ‘Will no one rid me of this troublesome priest?’.

The dollar started the day strong but weakened against the pound as election momentum picked up in the UK. Today sees the after effects of the result from the election dominating proceedings, with no US tier data to spoil the election party.

For more on currencies and currency risk management strategies, please get in touch with your Smart Currency Business trader on 020 7898 0500 or your Private Client trader on 020 7898 0541.