Currency Note

Markets focus on UK election and economic releases

By Paul Redmond May 16th, 2017

general election

The euro was in the ascendancy on Monday, strengthening against sterling and the US dollar. The worse performer was the US dollar which weakened as commodity-backed currencies received a boost with the limits on oil production looking likely to be extended.

We have a busy week of economic data to look forward to, starting today with the inflation figure for April. The UK labour data will be released tomorrow, and the market will be keen to know whether the divergence between average earnings and the consumer price index has widened further. Retail sales are due on Thursday, while today the flash first quarter (Q1) Gross Domestic Product (GDP) for the eurozone will also be published.

If in amongst all this busyness you find time, why not check out our latest set of quarterly currency forecasts? In them, we outline some of the things to look out for in the coming months, and demonstrate the importance of having an effective currency risk management strategy in place.

GBP: UK inflation set to push higher

Sterling remained fairly range-bound, although at the lower end of this range against the euro, as there was little economic data released from the UK.

The UK general election continues to gather momentum as political parties continue campaigning and presenting their case. The latest polling figures show the Conservatives on 49% and Labour on 31%. The Liberal Democrats are some way back on 9% and, with just three weeks to go, the Tories seem to have an insurmountable lead.

The EY ITEM Club – an economic forecasting group that produces quarterly economic UK forecasts – believes the jobless rate will rise from about 4.7% this year to 5.4% in 2018, and 5.8% in 2019. A member and advisor to the EY ITEM Club stated that ‘the UK labour market may be starting to become a victim of its own success. As the proportion of people in work has climbed ever higher, firms may have found it more difficult to fill vacancies, resulting in greater utilisation of the existing workforce and slower jobs growth.’

This week we have a heavy week in terms of economic data. Today, the consumer price index is set for release, which is the preferred measure of inflation. With the BoE raising its inflation forecast last week, we expect inflation to put slightly higher to a reading of 2.5%. On Wednesday the labour data is released, with particular focus on the claimant change and the average earnings. Finally, the retail sales will be released on Thursday – last month there was a 1.8% drop in sales and the market will be keen to see if the UK can buck this trend.

EUR: has Merkel strengthened her grip?

The single currency continues to strengthen after spending the first part of last week on the back foot. Data last week showed that the Q1 GDP for Germany posted a reading of 0.7% for the quarter and 1.7% on the annualised figure.

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Over the weekend we saw that German Chancellor Angela Merkel’s CDU political party took victory in the state election of North Rhine-Westphalia. This is key for Merkel as this is the most populous state and the SPD is the incumbent party. The German elections are due to be held in September.

Today we have the flash Q1 GDP for the eurozone and, with the encouraging data from the region, it will be hoped that the pace of growth has picked up. In addition, the German ZEW is set for release. The ZEW surveys about 275 German institutional investors and analysts on their view of the economy for the next six months and is a leading indicator of economic health. The inflation figures for the region follow on Wednesday in the form of the consumer price index.

USD: poor day for dollar but today could prove better

Yesterday was a rough day for the dollar with disappointing US manufacturing reports and increasing commodity prices, thereby weakening the currency. Furthermore, business activity has, so far, fallen in May. The New York Federal Reserve’s barometer posted a negative figure for the first time since October!

Looking to the week ahead we have a light data schedule for the dollar, with the main release being industrial production for April. We’re expecting a modest rise, which may help support the dollar after today’s downward trend.

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