Currency Note

Sterling experienced biggest one-day drop since February as general election result becomes murky

By Paul Redmond May 30th, 2017

general election

The back-end of last week saw sterling hit a one-month low as surprising uncertainty regarding the outcome of the UK general election bled through to the markets. We expect more volatility over the next couple of weeks as new polls showing new results on new days will undoubtedly be released, shaping the mood of the market. Currency risk mitigation needs to be at the forefront of your thinking.

The US dollar rallied after American’s first-quarter growth was revised up. That piled pressure on the pound which weakened significantly against the US dollar and the euro.

Finally, our very own Carl has written a piece about a recent study released by YouGov and URICA on the Supply Chain Funding Index. Do have a read and let us know your thoughts.

GBP: biggest drop in sterling since February, will it recover this week?

Last Thursday, sterling made its biggest one-day drop since February as election jitters returned to the market. In the first opinion poll taken since last week’s suicide bomb attack in Manchester, the Conservatives’ advantage over Labour has narrowed to just five points.

The YouGov survey put the Tories down a point on the previous week at 43%, while Labour gained three points to reach 38% of the vote. The narrowing is of concern to the market as fears of a hung parliament instead of a strong majority are now looking a real possibility. Theresa May has stated she wants a significant majority as this will give her the mandate for the best possible Brexit talks. It looks as if the market believes her.

With the start of a new month this week we start to get economic data for May being released. On Thursday and Friday we have the UK Purchasing Manager Indices (PMI) for manufacturing and construction released respectively. It is forecast that we will see a downturn in these figures albeit only slight.

Overall though, economic data is likely to take a back seat this week and next as the market will scrutinise the political landscape as we edge ever closer to the UK general election on 8 June. Last week’s poll shocked the markets which resulted in a risk off approach toward sterling. We would not be surprised if we saw the pound coming under further pressure throughout the week as the situation is far from clear.

EUR: quiet day for euro as sterling and dollar share spotlight

It was a quiet day on the data front for the euro on Friday, but the single currency enjoyed mixed fortunes throughout the day. It began by strengthening against a weak sterling, but lost ground from its multi-month highs against a strong dollar.

While we enjoyed a bank holiday in the UK yesterday, most European markets were open and we saw some money supply data released, as well as European Central Bank President Mario Draghi speaking in front of the Economic and Monetary Affairs Committee in Brussels. The euro gave back a proportion of the gains it made against sterling during the day.

Today is fairly quiet on the data front in Europe, with German and Spanish inflation data the main releases to keep an eye on. Later this week we have German retail sales, Europe-wide inflation data and Europe-wide purchasing managers’ index as the key announcements.

USD: a decent week for the dollar against sterling and euro, will this week’s data releases support it further?

The US dollar continued to strengthen against the pound as sterling came under yet more pressure given the closing in UK election poll results. The US dollar was also supported by an upgrade in first quarter gross domestic product figures which saw it increase in value against the euro, with the EUR/USD finishing below €1.1200. This was despite poor durable goods data out from the US at 0.4%.

With the advent of June we begin to see a number of key US economic data releases for May this week, with the most important day set to be Friday, although data releases earlier in the week can be influential. On Friday we have average earnings, balance of trade figures and the highly influential and much scrutinised non-farm payroll figures.

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