Sterling Drops Despite Positive Construction Figures
Sterling remains volatile ahead of next week’s parliamentary elections in the UK. Despite the releases of positive data regarding the condition of the British economy, the battle between Theresa May and Jeremy Corbyn seems to affect the Pound much more. A hung Parliament after 8 June is a possibility that neither investors nor traders are ready to cope with.
On the other side of the Atlantic, Donald Trump materialised his promise of pulling the US out of the Paris climate agreement. President Trump claimed that he withdrew in order to negotiate a better deal for his country. Right after the announcement, the leaders of Germany, France and Italy issued a statement in which they said that the Paris agreement is “irreversible” and cannot be negotiated. The US joined Syria and Nicaragua in the club of countries which are not included in the Paris climate agreement.
Pound Sterling – UK Markets
On Friday, the British Pound dropped against the Euro and the US Dollar. The Sterling to Euro exchange rate was set at €1.14 and at $1.28 against the US currency. As the elections in the UK are coming closer, the prospect of a rudderless country has made the Pound volatile, especially when the difficult Brexit negotiations with the EU are just around the corner.
Despite Sterling’s up and downs, the construction sector activity in the UK staged a strong comeback, after April’s weak performance and despite predictions that it would perform even weaker in May. The UK construction Purchasing Manager’s Index (PMI) rebounded unexpectedly to a 17-month high, surprising the markets. The key points that should be noted are that residential work replaces civil engineering as the best performing category and that business activity rises at the fastest pace since December 2015.
Brexit secretary David Davis, talking on BBC, hesitated to give a specific timeframe on when the government, if elected, is planning to cut on net migration. “We didn’t put a date, it’s the aim, but we can’t promise within 5 years, that’s the point,” said Davis. Prime Minister Theresa May expressed her disappointment over president Trump’s decision to pull out of the climate agreement, but preferred not to be included in a strong statement issued by Angela Merkel, Emmanuel Macron and Paolo Gentiloni.
US Dollar – US Markets
The US Dollar lost a bit of ground against the Euro, trading at €0.89. Later in the day, the release of data regarding the country’s unemployment rate and nonfarm payrolls is expected to affect the US currency.
The unemployment rate is forecast to remain unchanged at 4.4%, which is a 10-year low. US job growth is projected to remain strong in May, signalling the acceleration in economic activity. Economists suggest that a strong jobs report would assist the Fed to proceed with an interest rate hike at its mid-June meeting. Fed policymakers had agreed in May that it would soon be appropriate to raise borrowing costs, which are currently at historic lows.
After President Trump’s decision to abandon the global climate pact, oil prices fell below $50 per barrel. Oil market analysts believe that the possibility of a surging US oil production would limit OPEC members’ efforts to reduce their productions at their home countries.
Euro – European Markets
The Euro rallied against the British Pound, increasing in value by 0.3%, with the exchange rate between the two currencies set at £0.87. The single market currency also strengthened a bit against the US Dollar, trading at $1.12.
The Producer Price Index data for April (y/y) released were a bit below expectations, but even this wasn’t enough to stop the Euro’s course upwards against its main competitors. HSBC analysts suggest that the Euro and the Pound will trade at 1:1 by the end of 2017, indicating the strength of the Eurozone’s currency and the weakness of the British one.
A new poll coming from Germany shows that a total of 39% of German voters favour the current Chancellor Angela Merkel to remain in place, while 25% prefer the Social Democrat Martin Schulz. The next German federal elections are on September.
Other Currencies – Highlights
Sterling lost 0.3% in value against the Australian Dollar, with the exchange rate set at 1.74 AUD. Economists at the National Bank of Australia (NAB) estimate that Australia’s GDP will contract for the second time in three quarters. They suggest that the available economic data point to a modest contraction in the first quarter of 2017 of -0.1%. The most problematic sector of the economy, according to NAB’s report, is household consumption because of poor wages and household income growth.
The British Pound slumped against the New Zealand Dollar trading at 1.81 NZD. The Kiwi is getting stronger due to increasing expectations of an interest rate rise from the Reserve Bank of New Zealand (RBNZ). Market analysts express the opinion that the first RBNZ interest hike will occur earlier than May 2018, probably in February of the same year. The major concern for the country’s financial authorities is the risk of the housing bubble bursting. Goldman Sachs recently reported that the risk of the housing bubble going bust is approximately at 40%.