GBP/EUR – Narrowed Opinion Polls Dent Sterling Confidence
Although the latest UK manufacturing and construction PMIs bettered forecasts, demonstrating resilient growth on the month, this failed to shore up the Pound for long. While signs suggest that the economy has experienced a rebound after the first quarter’s disappointing weakness focus on the general election remained dominant. With the opinion polls continuing to show a narrowing of the Conservative lead over Labour investors have been less inclined to buy into Sterling. Despite the odds still favouring a Tory majority the prospect of a hung parliament has limited the appeal of the Pound. Fresh volatility is likely for GBP exchange rates once the results of the election become clear, with sharp market moves expected regardless of the outcome.
GBP/USD – Pound Set for Volatility on Election Result
In a slightly more disappointing development May’s UK services PMI was found to have slowed further than anticipated, undermining confidence in the strength of the main engine of the domestic economy. Concerns over the health of the economy are unlikely to diminish in the near future, particularly as Brexit-based uncertainty continues to loom. If the results of the snap general election are seen to increase the likelihood of acrimonious Brexit negotiations the Pound could come under increased pressure. Should Theresa May fail to achieve an increased majority in the Commons, or indeed lose her existing majority, Sterling could experience a fresh slump across the board.
USD/GBP – US Dollar Supported by Fed Rate Hike Expectations
Confidence in the US economy was knocked by a downside surprise from May’s non-farm payrolls headline figure, which showed an increase of only 138,000. While this was enough to push the unemployment rate down to 4.3% the weaker showing still put pressure on the US Dollar, particularly as wage growth figures also proved disappointing. Nevertheless, markets continue to expect an interest rate hike at the Federal Reserve policy meeting next week. This is likely to limit the downside bias of the ‘Greenback’ for the time being, although testimony from former FBI Director James Comey could provoke some volatility ahead of the weekend.
EUR/USD – Dovish ECB Meeting Could Weigh on Euro
An unexpected upwards revision to the first quarter Italian gross domestic product encouraged greater confidence in the Euro. While inflationary pressure across the Eurozone remains unconvincing to policymakers this latest sign of robust growth boosted optimism in the domestic economy. Even so, the European Central Bank (ECB) is not expected to show any major change in its outlook on monetary policy at its June policy meeting. If President Mario Draghi adopts a more cautious note in his accompanying press conference the mood towards the Euro could sour sharply. However, political developments in the UK and US could offer some measure of support to EUR exchange rates in the near term.