Election week. We’re into the final furlong. Will there be a shock on the cards for a late rally by someone (Jeremy Corbyn) to snatch victory like Wings of Eagles did at the Epsom Derby on Saturday? If not, will Theresa May deliver the landslide victory many have predicted?
This week we expect some sizeable movements for Sterling. Will the movements be as severe as leading up to the referendum vote? Probably not. However, the lack of certainty around this election will cause some sharp movements. We had some positive data out of the UK last week from the Construction industry with the PMI (Purchasing Managers Index) jumping from 53.1 to 56.0 in May. Does this mean the UK is starting to weather the storm post Brexit or a blip in the readings?
We are Sterling negative short-term. The shocking events over the weekend in London coupled with the horrendous events in Manchester a few weeks ago has heightened tensions in the UK. The outcome of the General election this week is going to be the main driver for Sterling short-term. Should we see a landslide victory for the Conservatives then expect this to be Sterling positive. We should see a spike higher on the news. Has this been largely priced in already? I think there is a little more room in the move now after Theresa May’s somewhat disappointing campaign. However, should the Conservatives win by anything less than a predicted landslide then this will be Sterling neutral at best. Should the unforeseen happen and Labour wins the election then expect Sterling to be sold off aggressively.
Should you have any immediate or upcoming Sterling exposure then consider utilising market orders. Why? Market orders give you access to the 24 hour market. We are likely to see some large movements during Thursday and into Friday morning. By placing market orders with the Trading Department you can look to achieve the best possible price at the best possible time. We will discuss appropriate levels to aim for and then place these orders in the market for you to automatically execute at on a GTC (Good till cancelled) basis. Should you have any questions on Market orders please contact me directly.
Sterling/Euro this week is likely to be under pressure. You can view the movements last week on the graph below –
As you can see, we have been up and down on an intraday basis although with a bias to the downside. I expect us to challenge the lower 1.13’s this week. We had positive data out of the Eurozone last week. German exports showed rapid growth driving the Factory PMI reading higher from 56.7 to 57.0 in April. Will the Euro continue along its stronger path? I expect the Eurozone GDP reading on Wednesday to print a strong figure. In addition, we have the ECB interest rate decision and press conference on Thursday. Interest rates will remain the same although should Mario Draghi, the ECB president, shake off the dovish noises and go on the front foot with more hawkish language then expect this to boost the Euro further.
Indeed, we have had Services PMI data released from the Eurozone and the UK this morning. The Eurozone data printed 56.3 against expectations of 56.2. The UK services PMI came in below expectations at 53.8 against a consensus estimate of 55.0. I expect this to be a general trend in the coming months. In addition to this EUR/USD broke through 1.12 the figure and has now found some support above this level. The Euro is looking to climb higher and any further upside on EUR/USD will likely drag Sterling/Euro lower.
We have inflation data out of the UK on Friday with the release of Consumer Inflation expectations. We expect inflation to edge slightly higher putting further pressure on UK households over the coming months. This is likely to prove Sterling negative.
If you have a requirement to convert GBP into USD or Euro please do consider locking in some at current levels. Yes, you’re probably not jumping for joy at present on current rates although once Brexit negotiations start in earnest a week or so after the general election then we may see Sterling fall further.
Please contact the Trading department for current SPOT rates.
You can view movements on Cable (GBP/USD) last week on the graph below –
The Dollar has been under some pressure in recent trade with the ‘Trump rally’ all but a distant memory. The NFP (Non-Farm payroll) figure came in at 138K in May. This fell well short of estimates of a rise of a 185K. The upside on Friday for the US was that unemployment fell to a 16 year low. The unemployment rate fell from 4.4% to 4.3%. This should give further weight to an expected interest rate rise in the US in June.
Will the US Dollar continue to show signs of weakness? I expect it to continue to be under pressure against the majority of G10 counterparts short-term. With President Trump dancing to his own tune there is likely to be sharp movements for the US Dollar in addition to equities and oil prices. Oil prices dropped last week with President Trump deciding to exit the Paris Climate deal for example.
If you have a requirement to purchase USD from Euro consider taking advantage of the recent upside. In addition, if you have a requirement to purchase USD from Sterling consider locking in a large amount of your exposure on a SPOT basis prior to Thursday and the UK election. This will take the main risk event off the table for you this week.
If you have any questions this week I would urge you to call a member of the Aston team to discuss your individual requirements in greater detail than normal. We can then structure a strategy that will help protect you whilst taking advantage of any moves in your favour this week.
Have a fantastic week.
Written by Liam Alexander