Sterling Cautious Ahead of French Elections
Sterling is unfazed by a week of upbeat data releases, and has dropped slightly, reflecting the overwhelming mood of caution in the markets. The Pound to Dollar exchange rate is at $1.29 and it looks as if the Pound will slide next week, while the Dollar seems destined to rise.
The US Dollar was at a six-month low against the Euro, yesterday, as Emmanuel Macron looks certain to win the French presidential election this Sunday. The Dollar is rising today and could strengthen even more after today’s release of the US Non-Farm Payrolls, but the Euro is expected to rally on Monday after France’s fateful election concludes.
Pound Sterling – UK Markets
At the end of the week, the Pound has remained flat against the Euro at €1.17. According to analysts, that rate marks the beginning of the end for Sterling’s strength over the last month and a half. In the middle of March, the British currency bounced back from a long weak period of swinging between the €1.12-€1.13 levels, reaching up to €1.19, after Theresa May’s snap election announcement. Lots of investors have even talked about the possibility of the Pound rising higher than the €1.20 rate, but some experts foresee a slowdown of the economy and a weaker Pound. They believe that, “[t]he rapid deterioration in the UK’s economic momentum has largely gone unnoticed by an FX market preoccupied with political distractions.”
Economists argue that, despite positive data about the expansion of the UK’s service sector, announced yesterday, the British economy has started slowing down in the first four months of the year. The GDP dropped more than expected to 0.3% for the first quarter of 2017 from 0.7% in the last quarter of 2016.
However, the GBP/EUR pair is still under the influence of current political events in Europe. The Pound’s strong performance in the last few weeks is due to predictions that the Conservative party is ahead in the polls, and that Theresa May’s strong and stable leadership will unite the country and guide it through the Brexit negotiations successfully. Still, some analysts believe that this is “at best half the story” and “the market’s focus may start to shift away from the UK’s negotiating stance to that of the EU”. Therefore, it is expected that Sterling will drop against the single currency to somewhere between €1.15 - €1.16, and €1.13 by the end of the year.
The Pound against the US Dollar is at $1.29 today, and economists are forecasting volatility for the pair due to political events in both countries. On the one hand, May’s Brexit negotiations and the snap election are affecting the Pound, on the other hand, Trump’s political and economic policies are creating uncertainty for the US Dollar.
US Dollar – US Markets
The recent slowdown of the US economy, the worst since the first quarter of 2014, has put more pressure on the US Dollar. However, “an improvement in US economic data, further rate hikes by the Fed, a rise in US Treasury yields and somewhat higher US real yields”, will possibly keep the Dollar stable.
The USD/EUR pair remains resilient due to the announcement of the U.S. Non-Farm Payrolls (NFP) report and US unemployment rate later today. The NFP index measures unemployment levels in every sector, apart from farming, non-profit and private household employees and it is an important economic indicator. For example, an increase in employment is a positive indication for growth – more new employees, more people to spend money on goods and services. According to predictions, 190,000 new jobs were added in April. However, experts predict that this won’t affect the unemployment rate which is going to rise 4.6%, from 4.5% last month. In light of these expectations, the US Dollar remains cautious, and is currently against the Euro at €0.91.
Euro – European Markets
On Friday, the Euro weakened against the US Dollar by 0.11%. The exchange rate was set at $1.09, failing to reach the $1.10 handle. Although the Euro to US Dollar rate jumped to a 6-month high on Thursday, the rally upwards didn’t continue.
Markets seem to have already priced-in Emmanuel Macron’s victory in the second round of the French presidential elections on Sunday. French media declared the centrist candidate the winner of Wednesday’s live television political debate against the nationalist candidate Marine Le Pen. If elected, he will be the youngest president in the history of France. Macron seems to have gained the trust of investors and markets because of his plans to loosen strict labour regulations and to reform the Eurozone with a common budget.
On the other side of the Atlantic, the initial claims for state unemployment benefits are below 300,000 for 113 consecutive weeks. This is regarded as a sign of a healthy US labour market, and combined with the possibility of satisfactory results on Non-Farm Payrolls (NFP), to be announced later today, the US Dollar is expected to get stronger against the Euro.
Other Currencies – Highlights
The Australian Dollar hit an 8-month low against the Pound with the rate set at 1.74 AUD. Analysts expect that the Aussie will continue to lose value against its British counterpart. Nomura, an important financial services group whose reports are taken into consideration by investors and traders, released a report that draws the Aussie’s future in grim colours. Nomura’s researchers suggest that the lower level of Australia-centric commodity prices and lack of decisive monetary policy by the Reserve Bank of Australia will continue to affect the currency’s value.
The Sterling to New Zealand Dollar exchange rate declined by 0.29%, set at 1.87 NZD. Over the past month, the Pound strengthened by 5% against the Kiwi, but today it was time for the Pacific currency to counter attack. The Reserve Bank of New Zealand helped that with a report indicating that it expects the Consumer Price Index to rise by 1.92% on annual basis, well above the 1.56% recorded in the first three months of 2017.
Sterling gained 0.28% in value against the Shekel. The exchange rate between the Pound and the Israeli currency was set at 4.67 ILS. The Pound managed to reverse the past week’s losses against the Shekel, which is getting stronger due to encouraging Israeli economic data.