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Pound stable, but is the Premiership?

Pound stable, but is the Premiership?

GBP
With the Conservative Party still negotiating a coalition with the Democratic Unionist Party after falling short of an overall majority, political uncertainty dominates. There is rising expectation that Theresa May’s stewardship will be short-lived, and that the Conservative’s Brexit stance will move from “Hard” to “Soft”, which is currently preventing the Pound from falling further. Sterling found support below 1.2650 against the Dollar and opens this morning at 1.2735, a post-election fall of 1.7%. The Euro opened at 1.1363, fall of 1.65%.

NIESR reported GDP growth of 0.2% in the year to May which maintained expectations of subdued growth. The UK industrial production and construction output data was weaker than expected for April, although there was a narrower than expected trade deficit for the month. There was a net increase in speculative Sterling short positions in the latest week, although there will still be scope for further selling.

Principal cabinet positions were unchanged in the reshuffle as the government looked to finalise a DUP deal. Back in 2010 when the UK last experienced a hung Parliament, there was an initial drop followed by a few days of consolidation and then a sharp slide lower after the coalition was announced. The same price action appears to be happening now, although the relief rally may be shallower given the consequences for Brexit negotiations.

USD

The Greenback continues to ease ground after last Friday’s highs, as tracked by the USD index, despite moving higher for the last three sessions; its longest streak in a month. The Dollar is expected to keep a cautious tone ahead of the Federal Open Market Committee (FOMC) meeting on Wednesday, even though market participants have almost fully priced in a rate hike. In this regard, CME Group’s FedWatch tool places the probability of such scenario at 99.6% based on Fed Funds futures prices.

Prior surveys expect the Committee to lean towards the hawkish side, while the timing of the reduction of the Fed’s balance sheet and the ability of the Fed to achieve its three rate hikes for this year should be the next key themes for the buck.

EUR

There was a narrower than expected German trade surplus for April with a 2.9% annual decline in export growth and stronger imports, although the impact was limited. The Euro also stays underpinned from the speculative front, with net longs climbing further to the highest level since late December 2011 during the week ending on June 6, as shown by the latest CFTC report.

The Euro was hampered to some extent by the UK General Election result with fresh uncertainty surrounding the UK negotiations which could have a negative impact on Eurozone business confidence. Positioning will maintain the potential for sharp liquidation if the Euro is unable to make further headway, although there were expectations of strong buying support on dips.

In the French parliamentary elections, President Macron’s En Marche party polled very strongly in the first round and looks to gain a strong overall majority winning with more than 32%. Their aim to get a majority in the National Assembly in the second round in two weeks’ time would boost confidence in the French outlook. There is uncertainty surrounding forward guidance as the Euro consolidated just above 1.1200 against the USD on Monday.

Data to Watch:
11:00am GBP Inflation Report Hearings.
7:00pm USD Monthly Budget Statement (May)

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