Sterling Strengthens Before DUP Deal
Sterling strengthened today against the US Dollar and the Euro, as Theresa May is scheduled to meet today with Arlene Foster, the Democratic Unionist Party (DUP) leader, in an effort to strike a deal over forming a minority government. Foster appeared optimistic saying that the DUP is close to concluding an agreement with the Conservatives. Later in the day, the UK government will publish its proposal on how it wants to treat EU citizens, who live in the country, post Brexit. While Theresa May has described the offer as “generous and fair”, some groups that represent EU citizens said that it’s “slightly pathetic.”
In the Eurozone, the Italian government announced that it will liquidate two of the biggest banks in the north, the Veneto Banca and the Banca Popolare di Vicenza. The two banks collapsed after years of mismanagement and poor lending. The European Commission approved the Italian government’s plan, which is expected to cost around €17bn. However, some analysts suggest that the intervention sought to protect senior bondholders and big depositors against the principles of the European banking union.
Pound Sterling – UK Markets
Today, Sterling strengthened against both the US Dollar and the Euro. The British Pound to US Dollar exchange rate was set at $1.27. Sterling gained 0.15% in value against the Euro, trading at €1.13. Theresa May is in the spotlight once more since she is meeting today with the DUP leader to continue their negotiations on forming a minority government. Later today, her proposal on how to treat European Union (EU) citizens, living in the UK, will also be published.
May is meeting today with Arlene Foster, the DUP leader, in order to make a deal to form a minority government, comprised of Conservative members of Parliament and the ten elected DUP lawmakers. The talks between the two sides have been carrying on for more than two weeks now, after May lost the majority in the Parliament in the June 8 elections. Foster wrote in the Belfast Telegraph that the two parties are close to concluding an appropriate agreement on a confidence and supply basis. Some senior Tory members have expressed the opinion that a deal with the DUP could put at risk the Good Friday Agreement in Northern Ireland. By lunchtime today, the DUP deal will be finalised, according to the BBC’s Laura Kuenssberg.
In the afternoon, the UK government’s 15-page proposal on how to treat EU citizens who live and work in the country post-Brexit will be published. The British government will offer the same employment, healthcare and welfare rights, but refuses to grant them the right to vote after living for five years in the country. Brexit secretary David Davis said that EU citizens, who qualify for “settled status”, will enjoy rights “almost equivalent to British citizens.”
US Dollar – US Markets
The US Dollar increased in value against the Euro, trading at €0.89. Investors and traders are expecting this week the publishing of data by the US Bureau of Economic Analysis, regarding the US’ economic growth in the first quarter of the year. Economists expect figures to show that the economy expanded at a 1.2% annual rate.
John Williams, who is the San Francisco Federal Reserve President, delivered a speech in Sydney and said that the US central bank needs to keep raising interest rates gradually to keep the economy balanced. In his remarks, Williams said that “if we delay too long, the economy will eventually overheat, causing inflation or some other problem. Gradually raising interest rates to bring monetary policy back to normal helps us keeping the economy growing at a rate that can be sustained for a longer time.”
The Federal National Mortgage Association, commonly known as Fannie Mae, released its last quarterly survey, which showed that consumer demand for home loans slowed while competition in the mortgage industry intensified. In order to respond to the tougher competition, more lenders noted that they plan to relax their lending standards to attract more borrowers.
Euro – European Markets
The Euro dropped against the US Dollar, trading at $1.11. The unexpected rise in business confidence in Germany, as it was reported by the Munich-based Institute for Economic Research (IFO), didn’t seem to help the single market currency.
The Euro suffered on news coming from Italy, regarding the Veneto Banca and the Banca Popolare di Vincenza. The Italian government decided to split the two banks into “good” and “bad” banks in order to prevent a bank run. On Friday, the European Central Bank (ECB) announced that the two banks were “failing or likely to fail.”
The “good” assets will be acquired by Intesa Sanpaolo, which is Italy’s biggest retail bank. Intesa Sanpaolo released a statement in which it noted that there is the possibility of closure of 600 branches and the departure, on a voluntary basis, of around 3,900 employees.
Other Currencies – Highlights
Sterling advanced against the Australian Dollar, trading at 1.68 AUD. Ian Narev, who is the chief executive of the Commonwealth Bank of Australia (CBA), talked against the plan of a new tax imposed on banks as it was announced by the state of South Australia. He said that new taxes levied on Australia’s banks are frightening off investors. His words were echoed by Westpac’s and National Australia Bank’s (NAB) officials.
The British Pound strengthened against the New Zealand Dollar, trading at 1.74 NZD. Data regarding the country’s trade balance, due to be released later in the day, are expected to show a minor reduction of the deficit. Analysts suggest that the data is unlikely to have a major impact on the Kiwi.
Sterling rallied against the Swiss Franc, gaining 0.3% in value, trading at 1.23 CHF. The Swiss National Bank (SNB) left the interest rates unchanged last week. In its announcement, the SNB renewed its commitment to intervene in the forex markets if needed, because the Swiss currency is “significantly overvalued.”