europe union building

Political Risks Reaching a Peak

20th May 2019 Market Update

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?? GBP –  The negative statistics for the Pound kept stacking up last week. Sterling strung together ten consecutive sessions of falls and had its worst week since February 9th 2018. The Pound fell to its lowest level against the US Dollar since January 11th and February 19th against the Euro.

The Pound broke out of its recent tight ranges with widely spaced support levels punched through. The central reason for the fall was the collapse of the Conservatives and Labour’s talks for a consensus on a Brexit proposal to present to Parliament. Added to this, it became clear that pressure on Theresa May would see her start the process for a successor to be appointed before Parliament’s recess begins in late July, regardless of whether her 4th attempt at the Withdrawal Bill passes or not. Markets have now anticipating a Eurosceptic leader to take over and as a result, the likelihood of a no deal is significantly increased.

This week will undoubtedly be dominated by Brexit as attention centres on the outcome on the EU elections on Thursday. Before that, inflation readings on Wednesday could provide some support for the Pound if CPI is published above 2% as expected, up from the 1.9% previously. This would see the level rise above the Bank of England target and will strengthen the calls for the MPC to act in the coming months. Retail Sales on Friday are expected to dip but they could be overlooked by the results from the EU Election creating volatility if the outcome makes the way forward more uncertain. The Election is being seen as a proxy second referendum as voters desert the main parties in favour of voicing their opinion on Brexit by supporting the Brexit Party and the Lib Dems. If the polls prove to be accurate and the Brexit Party wins convincingly, then the chance of no deal will be considerably higher and the Pound will likely fall as a result.

?? EUR – EU Elections also caused the Euro to backtrack in the latter part of last week. Anti-EU parties are expected to poll well which could upset the centre-right domination which has held for so long. As a result, the European Parliament could become a more fractured institution which will be limited in its ability to keep troublesome nations in check. Comments from Italy’s Deputy Prime Minister Matteo Salvini that he would “tear apart” rules that are “strangling” his country if his party does well are particularly undermining. The Euro will need further support in the coming years ang comments such as this mean that there is a lack of confidence that the Eurozone will be able to come to the necessary agreements.

PMI readings are the only data of note from the Eurozone this week which are due to be published on Thursday and expectations are for a slight improvement in the composite figure but for Manufacturing to remain in contractionary territory. Germany’s figures will be particularly focused on given that they are below 50 and continue to drag down the rest of the continent. lIt remains to be seen how the single currency will react to the votes across the continent

?? USD –  The Greenback was initially slow to benefit as a safe haven currency from the rising trade war tensions last week as it had done previously. However, when the wheels did start turning, the US Dollar reached 2 week highs on the Dollar index, supported by strong domestic data. Despite offshore Yuan reaching its lowest level since November at 6.9497, analysts expect that the Chinese Central Bank will intervene to prevent the rate moving past 7.
PMI reading are released on Thursday which are expected to remain broadly similar as last time, but Durable Goods orders on Friday are expected to drop. This contrasts with the stronger GDP figures seen last week and could knock the Dollar. However, expectations persist that the Dollar movements will be dictated by the war of words with China.

 

Summary:

GBP: EU Election likely to be biggest mover of the pound

EUR: Election in focus as well with anti EU parties gaining support

USD: US-China trade wars still dictating US dollar


 

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Darren Kilner

Darren Kilner

Darren is Head of Dealing at FairFX. Darren lives and breaths FX, his Mastermind topics are G8 currencies and economic forecasts.

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