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May resignation sends Sterling tumbling

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28 May 2019

Written by
Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.

The resignation of Prime Minister Theresa May on Friday provided the biggest fireworks of the week in the currency markets.

T
he decision and the subsequent leadership fight within the Tory party increases Brexit uncertainty and markets reacted by making Sterling the worst-performing major currency of the week. Elsewhere, it was a mixed scoreboard as the Dollar pulled back modestly against most of its peers, but without any dramatic moves. European elections were at the margin positive for the Euro, as populist parties mostly underperformed expectations and strongly pro-EU liberals and Greens scored large gains.

This week is a quiet one without major macroeconomic data or policy decisions in the main currency areas. We expect market action in FX to be driven by political fallout around Brexit and the US-China trade conflict.

Major currencies in detail

GBP

The announcement from Prime Minister May that she was resigning overshadowed a week of decent macroeconomic developments in the UK. Retail sales continue to grow at a healthy clip and core inflation remains well anchored just below the 2% level.

This week is a quiet one on the economic front. Markets will remain focused on the Tory leadership struggle and the fallout from European elections over the weekend where both of the main parties performed very poorly. We are increasingly of the view that the Brexit impasse cannot be resolved without a general election and a new parliament.

EUR

The Euro enjoyed yet another week of modestly good news, starting with the slight recovery in the PMIs of business activity and ending in the European Parliament elections over the weekend.

Populist anti-Euro parties did somewhat poorly, and strongly pro-EU liberal and Green parties registered the largest gains. With the political risks from the elections out of the way, and no immediate news expected regarding Brexit, we would now expect the Euro to respond to the recent string of good news and head back up towards the middle of its range against the US Dollar.

USD

In contrast to the Eurozone, the second-tier economic indicators out last week came out mostly on the weak side in the US, including the PMI surveys. The minutes of the last Federal Reserve meeting confirmed that the Fed sees no reason to move its rates up or down any time soon. Nevertheless, interest rate markets are pricing a full cut over the next 12 months. We think that the threshold for any move downward in rates is higher and expect unchanged monetary policy for the foreseeable future.

This week should be quiet other than the release of the Personal Consumption Expenditures report on Friday, which contains a key inflation indicator. This will be key given the focus that Fed members are putting on the absence of inflationary pressures so far.

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