Sterling Drops as Business Optimism Sinks
After the political uncertainty caused by last Thursday’s election outcome, Theresa May is now facing mutiny among her party’s MPs. Later today, she will attempt to regain the support of Tory MPs by talking at the 1922 Committee (composed of Tory backbenchers). Some of the Tories consider Theresa May responsible for the strategy that led the Conservatives to lose parliamentary majority. May is expected to promise changes in her leadership style and has already reshuffled her top team. A survey by the Institute of Directors (IOD) showed that UK businessmen are alarmed by the prospect of the political uncertainty caused by a hung parliament.
Emmanuel Macron’s En Marche! political party won the first place in the first round of the French parliamentary elections, yesterday. The French president’s party won 32% of the total votes, while once again, after the presidential elections, the traditional parties collapsed. The second round of the parliamentary elections in France is on next Sunday, with En Marche! projected to gain a landslide victory.
Pound Sterling – UK Markets
Today, Sterling dropped against the US Dollar, trading at $1.27. The Pound slumped against the Euro, losing 0.6% in value, with the exchange rate set at €1.13. The political turmoil in Britain caused by Thursday’s parliamentary election result continues to trouble investors and traders, who remain cautious.
Later today, Theresa May will try to convince Tory MPs to give her their support, by promising to run her government in a less controlling way. Some of the MPs blame May for being responsible for the Conservative majority being wiped out in last Thursday’s election. Brexit secretary David Davis expressed his full backing for Theresa May, but agreed that the election result was a “nightmare” for the Tories. When asked about the conservative views of the Democratic Unionist Party (DUP), Davis replied that “we don’t adopt their views, we don’t adopt their policies.”
The political uncertainty in Britain has triggered a series of reports by ratings agencies such as Moody’s and Standard and Poor’s (S&P). Analysts at Moody’s think that “the election result heightened uncertainty over Brexit negotiations and increased fiscal risks, which is viewed as credit negative. However, the result also means that the government may now consider softer Brexit options, which is considered credit positive.” The S&P report says that the country’s economic growth is likely to be damaged, weakening business environment and consumer confidence.” A new survey by the Institute of Directors (IOD) showed that 57% of the members are either quite or very pessimistic about the UK economy over the next year. Visa reported that the UK’s household spending fell last month, for the first time in the last four years.
US Dollar – US Markets
The US Dollar dropped against the Euro, with the exchange rate set at €0.89. Investors and traders are cautious ahead of the Fed’s policy meeting, during which, it is widely expected to hike interest rates.
Market analysts will be looking for any indication suggesting that the Fed thinks the US economy is strong enough to withstand further rate increases through 2017. The announcement of a rate hike combined with the suggestion that the Federal Reserve may raise rates more than expected in this year would strengthen the US currency.
Despite the expected Fed’s rate hike being top news in the US economy, data regarding the core CPI inflation and retail sales due to be released on Wednesday will also affect the US Dollar. Analysts at Nomura Group believe that core retail sales will continue to improve, based on healthy consumer fundamentals, such as firm job gains and income growth.
Euro – European Markets
The Euro gained ground against the US Dollar, trading at $1.12. The single market currency strengthened on news of Emmanuel Macron’s En Marche! victory on yesterday’s first round of parliamentary elections in France.
En Marche!, alongside its centrist ally MoDem (Mouvement democrate) party, won 32.3% of the total votes, more than 13% ahead of the Republicans’ group, which came second. Third was the National Front, led by Marine Le Pen, who was Macron’s main rival for the presidency. The second and final voting round is on next Sunday and if predictions are confirmed, Macron’s party and allies will enjoy the biggest majority in the National Assembly since 1993. The sweeping majority will give the newly elected French president the power to push through his plans on rebuilding the country’s economy.
German Chancellor Angela Merkel hailed Macron’s party win calling the result a strong vote for much needed reforms. Macron’s rivals emphasised the record-high abstention rate of around 50%, saying that the result doesn’t reflect France’s diverse opinions.
Other Currencies – Highlights
Sterling remained stable against the Australian Dollar, trading at 1.69 AUD. According to a report published by the Australian Institute, which is one of the most influential think tanks in the country, the Australian workers are getting a record low share of the country’s GDP into their pockets. The analysis showed that workers received 46.2% of GDP in the first quarter of 2017, which is the lowest percentage recorded since the Australian Bureau of Statistics started collecting data back in 1959. Jim Stanford, who is an economist and the director of the Institute, said that this finding indicates that policies including stronger minimum wages and further wage growth should be supported by the government, in order to reverse this decline.
The British Pound rallied against the New Zealand Dollar, trading at 1.77 NZD. The Pound increased in value by 0.45% against the Kiwi, managing to recover some of the losses it suffered, especially after the UK election result. The GDP growth figure for the March quarter is going to be revealed on Thursday, but economists are divided over how strong the growth will prove to be. Jane Turner, a senior economist at ASB bank, said that growth of less than 1% in six months doesn’t fit with robust business confidence surveys. Turner added that “sub trend growth could be an early warning that the economy is not firing on all cylinders.” The Reserve Bank of New Zealand (RBNZ) forecasts a quarterly GDP growth of 0.9%.