GBP/EUR – Pound Weakness Likely Ahead of Election
Opinion polls have provoked significant volatility for the Pound as the general election campaign enters its final days. As polling by YouGov suggested that the Conservative lead has narrowed dramatically to just three points the prospect of a hung parliament reared its head. This has put increased pressure on Sterling, with markets viewing anything less than an increased Tory majority as creating additional difficulty for Brexit negotiations. Given that other polls have pointed towards the Conservatives maintaining a strong lead, however, investors are still inclined to take the predictions with a pinch of salt. Either way the appeal of the Pound is likely to remain generally limited until the actual result of the snap election becomes known.
GBP/USD – Rally Possible on Resilient Services PMI
Although May’s manufacturing PMI showed a smaller dip than forecast this was not enough to boost the Pound on Thursday morning. While the sector remains in a state of solid growth concerns over the sustainability of this strength limited the potential for a Sterling rally. However, if the corresponding services PMI also demonstrates greater resilience GBP exchange rates could trend higher. Given that the majority of UK economic activity is driven by the service sector a stronger showing here could outweigh ongoing political jitters, at least in the short term. If the service sector is shown to have weakened in May, though, the mood towards Sterling could sour further.
USD/GBP – Strong Payrolls Could Boost Fed Rate Hike Odds
US data has remained rather mixed in recent days, encouraging speculation that the Federal Reserve may not raise interest rates at its next meeting. Both the manufacturing sector and housing market continued to demonstrate signs of weakness, undermining confidence in the resilience of the world’s largest economy. However, demand for the US Dollar could recover ahead of the weekend if the latest non-farm payrolls report proves positive. Although the headline figure is not forecast to see an increase on the month the unemployment rate is expected to hold steady, with wage growth also picking up. While the health of the wider economy remains questionable sustained tightness in the labour market would still give investors reason to buy back into the ‘Greenback’.
EUR/USD – Weaker Inflation Limits Odds of ECB Hawkishness
Weaker-than-expected German and Eurozone consumer price index reports added to expectations that the European Central Bank (ECB) will remain on hold for the foreseeable future. ECB President Mario Draghi maintained a generally cautious tone in his latest comments, putting downside pressure on the Euro even as the Eurozone labour market continued to tighten. Worries over Greece are likely to remain something of a drag on the single currency in the coming week, with markets nervous over the delayed release of the next tranche of bailout funds. Even so, EUR exchange rates may find a rallying point if the tone of the ECB’s June policy meeting is seen to leans less towards dovishness.