Currency Note

Uneventful day of data still sees pound slide

By Paul Redmond June 13th, 2017

sterling weakening

On what was a relatively quiet day for UK economic data the pound still slid as the political pantomime that is Westminster continued. At one point on Monday, the pound hit a new seven-month low against the euro, dropping to €1.1280. It also continued to lose ground against the US dollar, hitting $1.2671 which is close to the eight-week low it hit after the general election.

It is difficult to see any support for sterling in the short term as the fallout from the general election result last week still hovers in the air, and the fact that the Conservatives are in talks with the Democratic Unionist Party (DUP) about forming a government will do nothing to quell speculation and uncertainty.

May’s apparent refusal to acknowledge she did not get the mandate she expected has also thrown future Brexit negotiations into doubt.

Reports that the Queen’s Speech – where the government sets out its legislative programme – has been delayed for a few days, have helped maintain a sense of uncertainty across the City and beyond. It’s felt that the decision to delay it is down to the Conservative Party not yet knowing what will go into it, as well as the ongoing talks with the DUP.

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GBP: general election 2017 – the saga of uncertainty continues

Despite the lack of economic data, yesterday saw sterling resume its downward trend as the market focus remains on the political uncertainty surrounding current UK Prime Minister Theresa May and the Conservatives. The suggestion that the Queen’s Speech could be rescheduled has done nothing to stifle the idea that the government is in turmoil.

After losing their majority in last week’s election, the Tories are currently in talks with the DUP about forming a coalition. Many of the beliefs of those in the DUP are at odds with the Conservatives’ and it will be interesting to see what compromises are reached. It looks likely the arrangement will be a precarious one and, according to several bookmakers, the chances of another general election in 2017 are currently around 30%.

Moody’s has also warned that the UK’s credit rating could be downgraded after last week’s hung parliament. While political events will likely dominate the coming days, later the headline inflation numbers will be released. The consumer price index (which is the Bank of England’s preferred measure of inflation), is expected to remain at 2.7%. If it falls short of this, sterling could weaken further.

EUR: Macron moves towards a landslide victory

Over the weekend it was revealed that French President Emmanuel Macron’s centrist party is set to dominate the parliamentary elections after the first round showed on Sunday. Current projections from the first round of voting estimate that Macron could claim as many as 445 seats of the 577 available.

While the euro has consistently outperformed sterling of late because of the ongoing political uncertainty, it did slide slightly against the US dollar. The main reason for this is most likely a light calendar and pending risk, with a US interest rate decision due on Wednesday.

Today we have the German ZEW economic sentiment set for release. To provide an indicator of economic health, the ZEW surveys about 275 German institutional investors about their view on the six-month economic outlook for Germany.

USD: quiet day for dollar as attention turns to tomorrow

Yesterday was a pretty quiet day for the dollar, with little movement and no major data releases leading to a fairly flat day on the currency.

Wednesday’s Federal Open Market Committee meeting is the key focus. An interest rate hike is already fully priced in and a decision against this now would likely lead to a weakening of the currency.

At the moment, British politics seems to be the main market focus, so we’re not expecting to see a huge amount of movement prior to Wednesday’s announcement. We’ll be keeping a keen eye on any future indicators of further rate hikes.

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