Currency Note

Sterling under threat even before the weekend’s terrible events

By Christopher Nye June 5th, 2017

terrible events

Sterling was set for a volatile week anyway as we head into the final stretch of the 2017 UK general election, but the London attacks on Saturday evening are making our currency even more susceptible to further weakness.

There are many possible scenarios for the election but anything other than a Tory landslide could see a ‘run on the pound’. Given the Conservatives’ lead has narrowed considerably since Theresa May called the snap election on 18 April, it’s fair to say that anything could happen.

We’ll be tracking events throughout the week, with daily reviews of election news and we’re extending our opening hours on Thursday and Friday to ensure you can get in touch with us if you have any currency risk management concerns. But given the uncertainty and recent history it may be sensible to avoid the last minute rush and talk to your trader ASAP.

If you’re looking to buy a property abroad in these volatile times, our partner organisation, the Overseas Guides Company, can equip you with many useful tips at their Your Overseas Home event in Manchester on 24 June.

GBP: sterling under pressure due to attacks

The London attacks pushed sterling lower in early trading this morning.

Sterling will be driven by further election updates throughout the week. What once appeared to be a done deal for a Conservative majority now hangs in the balance in a way hardly anybody could have anticipated. Since May’s announcement the opinion polls have narrowed with the latest YouGov poll having the Tory lead at just three points over Labour.

Anything other than a Conservative landslide would be viewed as a failure in what May says she set out to do in calling the election: securing a bigger mandate for Brexit negotiations. Billionaire investor George Soros stated at the World Economic Forum in January that he believes May ‘will not last’ and that Britons are ‘in denial’.

In terms of economic data, it is worth noting that the purchasing managers’ index for the service sector is released in the UK and is a major gauge of economic activity. However, the effect on the currency could be muted given the amount of news flow and opinion set to hit the wires. It is likely that we will see a ‘risk-off’ approach towards sterling throughout the week as investors take their money off the table ahead of this crucial event.

EUR: will the ECB change its rhetoric on Thursday?

The UK election will be closely watched across Europe too, not least because the Brexit negotiations are set to begin again this month. In the meantime, there will be a lot of focus on the European Central Bank (ECB) meeting that is coincidentally held on the same day as the UK elections. The eurozone will surely give a flow of positive data, although inflation did taper last week somewhat.

There has been speculation that the ECB could change the rhetoric that is set to follow the interest rate decision on Thursday in a move to signpost to the market their intent to slow the asset purchasing via quantitative easing. If the ECB messaging leans towards tightening monetary policy then we could see the euro strengthen on the back of that. On the other hand, if the ECB is slightly dovish the euro could lose momentum.

This makes Thursday potentially an extremely volatile day for the single currency as it is exposed to both the UK election and ECB risk.

USD: non-farm payroll figures much lower than expected

Due to a greenback sell-off the GBP/USD pair recovered its losses and rose to a fresh high of 1.2904, yet this did not last for very long. The pair finished below 1.2900 on Friday before close of business. Referring to Fibonacci levels (a technical analysis of currency movements), 1.2820 is a key level investors will be on the lookout for; if the pair starts trading below this level it could create bullish US dollar strength.

The US dollar index fell to its lowest level (below 97) following a poor non-farm payroll figure at 138,000 against a forecast figure of 181,000.

In early trading this morning, the dollar recovered some of last week’s losses. Today we have non-manufacturing data coming out from the US. We are also in the build-up phase to next week’s Federal Reserve meeting on interest rates. The markets are giving a 90% chance for a 0.25% increase in US interest rates although the rhetoric is changing given the lacklustre performance of the US economy.

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