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Coalition deal prompts more cries of “Leave”

Coalition deal prompts more cries of “Leave”

GBP 
Sterling gained 0.2% against the Dollar and Euro yesterday after Prime Minister Theresa May struck a deal to prop up her minority government. The Conservative’s secured the backing of Northern Ireland’s Democratic Unionist Party (DUP) and its ten lawmakers, concluding two weeks of talks since May lost her majority in last month’s election. The deal peels away one layer of uncertainty for Britain as it negotiates its exit from the European Union.

The Pound recovered more than a cent of its post-election losses as investors have upped their expectations for an increase in the record low interest rates in the UK. More policymakers at the Bank of England (BoE) voted for a hike than expected at its last policy meeting, and its chief economist said last week that he expected to vote for a hike later this year.

Some market participants are less optimistic and think the economic data will continue on a slowing path ahead of the August meeting where the BoE may stick to the status quo and all these hawkish expectations will fade away.

USD

Yesterday’s US open saw the Dollar initially profit from positive risk sentiment. The Buck temporarily reversed the intraday gains on disappointing US durable orders but bounced back shortly afterwards.

Today’s Consumer Confidence reading is expected to ease slightly, but a drop further than forecasted may add to lingering uncertainty surrounding the Fed rate hike path and could tarnish the Dollar in the process.

Markets may be cautious to place big bets ahead of the Fed’s Yellen’s speech in London at 7pm. If she addresses monetary policy, it’s likely the message will be consistent with that heard after the June Fed rate decision, which may, in turn, limit any downside for the Greenback. Any serious rebound would depend on US data improving.

EUR

Risk appetite dominated financial markets during the early part of yesterday with the news that the EU Commission approved a EUR 17bn Italian government plan to rescue two local banks. Also, the German IFO survey showed that local business confidence surged to a record high in June, with the index up to 115.1 from 114.6 previously and the expected 114.1.

European Central Bank (ECB) President Mario Draghi orated to university students in Lisbon yesterday, saying super low rates create jobs, foster growth and benefit borrowers, ultimately easing inequality. Draghi will speak again at the ECB forum on central banking and is likely to reiterate the positives of lower rates and once again squash hopes of a reduction in monetary easing. This could trigger a Euro selloff. The Euro had fallen earlier this month after the ECB said policymakers had not discussed scaling back its massive bond-buying.

Data to Watch:
9:00am EUR ECB President Draghi’s Speech. 
10:30am GBP Financial Stability Report. 
11:00am GBP BOE’s Governor Carney Speech. 
2:00pm USD S&P/Case-Shiller Home Price Indices (YoY) (Apr). 
4:15pm USD FOMC Member Harker Speech. 
6:00pm USD Fed’s Yellen Speech. 
10:30pm USD FOMC Member Kashkari Speech.

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