Sterling
Having rallied on Thursday in response to a surprise Bank of England policy announcement, which featured three votes for higher interest rates in June, the Pound softened a little bit on Friday as traders locked in profit. The BoE voted 5-3 against raising rates this month but analysts do not expect additional policymakers to vote for a rate hike anytime soon. The consensus is that the central bank will use rhetoric and split votes to defend the Pound, as this should help prevent higher import costs driving four-year high UK inflation even higher.
Euro
The Pound to Euro exchange rate softened by around half a cent on Friday and GBP/EUR weakened again when markets reopened for this week’s session.
Today is the official starting point for Britain’s Brexit negotiations with the EU but traders are sceptical as to how much can be achieved given that Prime Minister Theresa May is still trying to thrash out a deal with the DUP propping-up her minority government. The Brexit talks were always going to be gruelling, but with crumbling support, following her ill-fated decision to hold a snap election, Theresa May faces the tortuous task of negotiating a new trade deal with a 27-nation bloc boasting around five times the economic might of the UK at a time when her Brexit strategy is being publicly picked apart by her own ministers.
The EU wants to provide a plan that works well for both parties. However, chief negotiator Michel Barnier will be minded not to give Britain a deal that is preferential to full EU membership, so as not to tempt others nation states into filing for divorce. This will make matters difficult for May, who initially laid out plans to break from the bloc completely if a preferential deal was not agreed.
Investors hope that the election result will prompt a shift in strategy that sees Britain maintain access to the single market and customs union, as this is viewed as positive for business sentiment and economic growth. This option could see Sterling trend higher in the long run. However, there is a very real fear that British political instability will prevent any meaningful progress, and could therefore condemn the UK to a hard Brexit with no new trade deal. This option could see another sizable depreciation in the Pound.
US Dollar
US data came in lower-than-anticipated on Friday, allowing the Pound to avoid defeat against the US Dollar.
Holders of the ‘Greenback’ were disappointed by news that US housing starts tumbled -5.5% in May and that the Michigan consumer sentiment index slowed from 97.1 to 94.5 at the start of June. The Michigan consumer confidence index had been predicted to remain around the 97.0 mark, so demand for the US Dollar softened when the print hit newswires. Demand for the US currency was also dampened by news that the sentiment index dropped even further, to a two-and-a-half-year low of 86.7, in the days following the James Comey testimony. This suggests that Americans are concerned that President Trump’s premiership could be impacted by claims that he perverted the course of justice.
Canadian Dollar
The Pound to Canadian Dollar exchange rate skidded lower by around 60 pips on Friday as political concerns weighed on the UK currency.
Oil prices edged higher slightly, which gave the ‘Loonie’ a little bit of support, however, analysts fear that the oil market could be choked by a surge in US shale production. Indeed, production has increased by more than 700,000 barrels per day since September 2016, which has kept a lid on the oil rallies that shale producers are hoping to take advantage of. If oversupply continues to drag prices lower then we could see the Canadian Dollar suffer, as crude is the nation’s most-lucrative export.
Australian Dollar
Sterling slid by around -60 pips versus the Australian Dollar over the weekend as markets geared up for what looks to be a testing start to Britain’s Brexit trade talks with the EU. A bad deal could seal a fate of negative economic consequences for the UK, while a good deal could be very difficult to achieve, especially considering Theresa May’s fragile position and damaged authority.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate declined by over a cent on Friday as traders locked in profit, following a day of surprise Sterling gains on Thursday when three BoE officials voted for higher interest rates.
Data Released
GBP Formal Brexit Negotiations Will Begin High