Pound Sterling (GBP) Fails To Hold Gains Despite DUP Deal
After two weeks of negotiations Theresa May finally managed to strike a deal with the Democratic Unionist Party (DUP) to prop-up her minority government yesterday.
In exchange for around £1 billion of investment in Northern Ireland, DUP and its 10 lawmakers agreed to a ‘confidence and supply’ deal that gives May the necessary numbers to pass her Queen’s Speech and subsequent new bills. The news peeled away one layer of uncertainty, however, despite the delays, investors were never really in doubt that the DUP would reach an accord with the Tories.
Sterling initially picked up in response to the announcement but the Pound pared its gains later on in the day, with investors wary that May’s time as PM is unlikely to last for long given her failed election campaign. Politicians from opposition parties in Great Britain were fairly united in their condemnation of the Tory-DUP deal, which many saw as May throwing money at Northern Ireland at the expense of other devolved regions. Even with the slim majority afforded to her by the support of the DUP, May’s position is insecure and dark mutterings suggest she may face a leadership challenge from within her own party over the next few months.
GBP/EUR Flat As European Leaders Unimpressed By EU Citizen Rights Offer
The Pound to Euro exchange rate remained fairly flat through yesterday’s session as markets digested news that EU chief negotiator Michel Barnier was not happy with Theresa May’s offer for EU citizen rights.
May released more details of the offer that aims to protect the rights of EU nationals living in Britain. The government says the deal would offer them most of the same benefits that British citizens are entitled to, but EU negotiator Barnier said Britain needed ‘more ambition, clarity and guarantees’, adding that he wants the UK to guarantee the same level of protection as in EU law.
Although the offer marks a shift in negotiation strategy towards more amicable talks, the fact that European leaders are not impressed with the deal suggests that May’s weakened position will prevent her from gaining a positive deal from the two-year Brexit talks. This pessimism could keep Sterling down against the single currency.
GBP/USD Softer Despite Downbeat US Durable Goods Print
US durable goods orders contracted -1.1% in May, it was reported yesterday, disappointing expectations of a slightly milder -0.6% dip. The underwhelming report marked the second decline in a row and the worst score for six months as firms cut back on new investments.
The US Dollar has failed to fully capitalise on Sterling’s weakness as of late, and this is largely due to the onset of softer domestic data. While the Federal Reserve raised rates in June and intends to hike one more time in 2017, markets believe that economic moderation will persuade policymakers to wait on the sidelines until March 2018. This shift in rate hike expectations has weighed on the ‘Greenback’ but it means that additional losses in GBP/USD are possible if US economic data starts to improve.
Today we see the latest US consumer confidence index and a report from Federal Reserve Chairwoman Janet Yellen. If either point to a sooner-than-anticipated tightening of US monetary policy then we could see the Pound to US Dollar exchange rate depreciate.
Pound To Canadian Dollar Exchange Rate Down Half A Cent
Sterling lost out on around half a cent against the Canadian Dollar yesterday but the Pound could recoup some of its losses if today’s financial stability report from Bank of England Governor Mark Carney impresses markets.
The BoE launched a raft of new stimulus measures to prop-up the economy following last year’s shock Brexit vote. A year on and the economy is slowing, but it’s not crashing like many economists predicted, meaning Carney could conceivably remove some of the stimulus. This would likely boost Sterling across the board. On the other hand, a cautionary statement could send the Pound tumbling.
Australian Dollar Gains As Risk Appetite Improves
The Pound shrunk by around -70 pips against the Australian Dollar yesterday as Theresa May’s deal with the DUP failed to boost British sentiment significantly. Meanwhile, the ‘Aussie’ Dollar benefitted from a rise in global risk appetite, which saw high beta currencies and commodities increase in value. Risk sentiment improved in reaction to expectations that the Fed will not raise interest rates again this year.
New Zealand Dollar (NZD) Rises Vs. Sterling
The ‘Kiwi’ Dollar appreciated by around half a cent versus the Pound yesterday as rising risk sentiment helped drive demand for the New Zealand Dollar.
Data Released
11:00 GBP Carney Speaks at Financial Stability Report Press Conference
15:00 USD Consumer Confidence (JUN) High 116
18:00 USD Fed’s Yellen Speaks on Global Economic Issues in London