Sterling Steady around $1.284 after General Election News
Sterling rallied yesterday after Prime Minister Theresa May’s unexpected announcement of an 8 June general election. Her surprise political U-turn is expected to give Conservatives a landslide victory. The pound has continued rising in Asian markets today, as investors expect Brexit’s outcome will be more market-friendly.
The US dollar is still weighed down by concerns that President Trump’s tax reform policies will be delayed as last-minute US taxpayers queue to pay their taxes today. Tension over the US reacting to North Korea with a military strike has eased a little since Trump dismissed his ‘armada’ from the region.
Pound Sterling – UK Markets
The pound rose to a 6-month high of $1.29 late yesterday after news of the 8 June snap general election. Yesterday, Ladbrokes gave the Conservatives a 1 in 5 odds of winning a majority, so it appears that the Prime Minister’s political gamble will pay off. When her party does win, it increases the Prime Minister’s power and increases the likelihood she’ll push for a ‘hard Brexit’. It will also strengthen the government’s hand at the negotiating table with Brussels since it has been pointed out by opponents that Theresa May wasn’t elected into office. Scotland’s Nicola Sturgeon said that the general election results will determine Scotland’s future and also that the 2nd referendum vote will be scheduled at a time that suits Scotland best.
The market clearly favours a stronger government, so the decision to hold the elections is seen as a ‘game changer’ for the pound. The International Monetary Fund’s (IMF) report yesterday also increased economic optimism because it upgraded its projections for the UK’s GDP to 2%. This was the second time in 3 months that the IMF recalculated the UK’s economy and found it to be resilient post-Brexit. The IMF’s upgrade now puts the UK economy in second place for the fastest growing advanced economy, behind the US.
US Dollar – US Markets
The US dollar remains weak against most major peers after getting a brief boost by comments from US trade secretary Steven Mnuchin’s saying he’s in favour of a strong dollar. Vice President Mike Pence is heading a 10-day economic tour of Asia, on a mission to reassure trade partners that the US wants to increase its trade agreements in the region, even though it’s not participating in the Trans-Pacific Partnership (TPP) trade deal. The American Chamber of Commerce in China warned that 2017 could be the toughest year for US businesses in China. It suggested the US ‘use every arrow’ in their quiver to counter balance Chinese policies that support domestic companies to the detriment of foreign ones. US President Donald Trump and his Chinese counterpart Xi Jinping agreed to a 100-day plan to reduce the US trade deficit with China. The $347 billion trade deficit last year is by far the largest one the US has with any other country.
President Trump’s border tax relies on a flawed, ‘laughable’ theory that contends that the foreign exchange (FX) market is easy to predict, say US currency traders. Wall Street’s currency experts transact $5.1 trillion in currency daily, and the US FX experts are unanimous in their opinion that the Republicans’ border tax plan won’t increase the US dollar by 25%. The tax plan can’t increase the dollar by that amount because the plan underestimates the global market influence on the dollar that the US can’t control. The US trades $14 billion a day. This is a mere 0.3% of the $4.4 trillion traded globally. This currency value rise that politicians have been so confident about is crucial to the border plans’ success. If the dollar doesn’t appreciate, American’s won’t be able to afford the imports which would have once been cheap, but will be more expensive after tariffs.
Euro – European Markets
The euro has slumped ahead of the first round of French elections this Sunday. It will be difficult for the single market currency to make any real recovery until after the 7 May vote is counted. Marine Le Pen, who is neck and neck with Emmanuel Macron for the Presidency, said yesterday that she’d suspend all legal immigration to France. If France’s election is won by either Le Pen or Jean-Luc Melenchon, some analysts expect the euro would drop to parity with the US dollar.
In other election news, after protests over election irregularities, the European commission has said Turkey should launch a transparent investigation into the results of the referendum. Turkey won’t cooperate with efforts to investigate, and President Erdogan has dismissed the notion of an election fraud investigation, saying foreign observers should ‘know their place’. A member of the Council of Europe observer mission said up to 2.5 million votes might have been manipulated during last Sunday’s vote. Analysts at Fitch ratings agency have said that because the referendum gives President Erdogan more power it will have a positive effect on Turkey’s economy by facilitating necessary reforms.
Other Currencies – Highlights
With rising tensions worldwide, nervous investors are turning to safe haven assets-especially gold-and safe haven currencies like the Japanese yen. The yen has surged in the past 2 weeks since the US bombed a Syrian airbase and it’s risen again after the first round of economic discussions with the US trade representatives in Tokyo. Although each trade team expressed optimism, they failed to put to rest the expectation that President Trump will be critical of Japan’s policy of keeping the yen weak in order to aid exports. The talks are being seen as a significant indicator of how the Trump administration intends to apply the protectionist policies he’s expected to deliver in Japan and across Asia.
The US is combatting what it sees as unfair trade practices in the economic discussions with Japan. The US Treasury Department expressed concern over the persistent trade imbalance when they released the report last year that Japan had a $69 billion trade surplus with the US. President Trump promised to shrink the trade deficit with countries like Japan by negotiating bilateral trade deals with each of the 12 nations that have agreed to the TPP. US Commerce Secretary Wilbur Ross is also on the visit, and he’s taken a hard line on the US’s trading stance. He’s also said he wants to increase trade ties with Japan, which indicates the US intends to export more, particularly American cars, which aren’t as popular in Japan as Japanese cars are in the US. The Vice-President expressed impatience in striking a trade deal with Japan, saying that he wants the current preliminary dialogues to move quickly to the negotiation stage.