Currency Note

Manchester attack and the Tories’ policy U-turn render sterling particularly volatile

By Paul Redmond May 23rd, 2017

sterling weakening

Before last night’s terrible events in Manchester the pound had had a volatile Monday, dropping below the psychological US$1.30 level in the morning, before clambering back. The lack of UK economic news has trained the markets’ spotlight onto the UK general election and the Tories recent slide in the polls. It‘s expected that there could be sustained volatility in the pound until after the election.

As a mark of respect to the victims of the bomb blast, all parties have put their election campaigns on hold. Early trading has seen sterling weaken although not significantly at this stage.

It is also worth noting that Angela Merkel thinks the euro is too weak which, given its recent bout of strengthening, means that further positive movement for the euro could be on the cards.

Meanwhile, our very own Charlie put together a piece concerning the Supply Chain Funding index (SCFi). It’s an informed view on what SMEs can do to lock in currency exchange rates to create confidence in the supply chain. Take a read.

GBP: sterling hits two-month low amidst political uncertainty

Sterling started the day by falling back against the US dollar, dropping below the psychological US$1.30 level, in response to the Conservative’s ‘dementia tax’ policy that did not go down well with voters. The opinion polls showed the Tories have the narrowest advantage they have held all year, suggesting their manifesto has not struck the right chord with the electorate.

Theresa May promptly responded by performing a dramatic U-turn on the proposed changes to social care funding in England. The pound then clambered back against the dollar, as the ongoing saga regarding President Trump continues to weigh heavy on the greenback.

Looking to the day ahead, we have the Bank of England inflation report hearing before Parliament’s Treasury Select Committee. We don’t expect to see any major divergence from the quarterly inflation report at the beginning of the month. In addition, the public sector borrowing figures are due to be released.

EUR: euro pushes to fresh highs

German Chancellor Angela Merkel spoke with a group of school children in Berlin yesterday morning, telling them that the euro was ‘too weak’. In response, the single currency continued to push higher against the US dollar, reaching levels not seen since November 2016.

Brexit was high on the agenda of the Eurogroup meeting, although it was the Greece debt relief talks that stole the headlines. The Eurogroup stated that a decision will only be taken at the end of the bailout in mid-2018.

There is a flood of economic data set for release today. The German IFO survey hits the wires later; it’s a leading indicator of economic health as it surveys about 7,000 businesses and asks them for their six-month expectations. In addition, we have a key data release in the form of the purchasing managers’ indices for both the service and manufacturing sectors.

USD: Trump addresses Muslim leaders, but dollar still weak

Last week was the first time we’ve seen investors start to react to the problems associated with Donald Trump’s administration. It began with the surprise firing of ex-FBI Director James Comey, and continues as fresh scandals threaten to engulf his regime.

On Sunday, Trump addressed the leaders of 40 Muslim nations in the Saudi capital, signalling a move away from the anti-Islam rhetoric of his campaign. However, the markets are yet to react, as the controversies of the administration make it difficult for him to get any significant fiscal stimulus passed through Congress in the near future.

Markets will continue to pay particular attention to political developments in the US, if only to help them formulate ideas on what might happen to the dollar. Tomorrow, the Fed minutes will be released, and could support the dollar well, especially if the tone reinforces what we’ve heard in previous months.

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.