Pound firms as Labour secures massive majority
The pound (GBP) got off to a slow start last week, with the currency being pressured by the UK’s latest manufacturing PMI after growth in the factory sector was revised lower in June’s finalised figures.
An optimistic market mood helped the increasingly risk-sensitive Sterling to quickly rebound as we entered the middle of the week, with further support following the UK’s latest services PMI after growth in the vital services sector outpaced initial expectations in June.
The second half of the week was then dominated by the UK general election.
While a Labour landslide had already been priced in by GBP investors ahead of time, the pound was able to carve out some modest gains amid hopes the new government will usher in a new period of political stability, following a turbulent few years under the Conservatives.
Looking ahead, Labour’s first week in office will be closely watched by GBP investors as they seek to learn more about the new government’s policy priorities. Also of note to GBP investors will be the UK’s latest GDP figures. UK economic growth is forecast to have accelerated in May and may help to lift the pound in the second half of the week.
US dollar undermined by Fed rate cut bets
The US dollar (USD) traded erratically at the start of last week, with the safe-haven currency initially firming amid a cautious market mood, before tumbling following comments from Federal Reserve Chair Jerome Powell.
Speaking on a panel at the European Central Bank’s (ECB) Sintra forum, Powell suggested that recent US inflation figures ‘do suggest that we are getting back on a disinflationary path’.
The USD selloff then accelerated in midweek trade in response to some lacklustre US economic releases.
A surprise drop in the US ADP employment figures triggered an initial dip in USD exchange rates, before further losses followed as the latest ISM services PMI reported a surprise contraction in US service sector growth last month.
The US dollar then remained on the defensive through the second half of the week with the publication of the latest US non farm payroll report, as a slowdown in the US labour market stoked bets the Fed will start cutting interest rates in September.
Turning to this week, the primary focus for USD investors will be the latest US consumer price index. This could leave the USD selling bias firmly in place as June’s CPI figures are forecast to show another deceleration in US inflation and place more pressure on the Fed to start cutting interest rates.
Euro rocked by French election
The euro (EUR) initially jumped last week, following the first round of the French legislative election.
EUR investors appeared relieved that the far-right National Rally (RN) party performed below expectations, amid hopes it would not be able to pursue it ‘unsustainable’ fiscal policies.
However, the single currency was unable to sustain these gains for long, with the euro coming under pressure after data showed Eurozone inflation cooled in June, stoking bets for additional interest rate cuts from the European Central Bank in the second half of the year.
This EUR selling pressure was then reinforced by a weaker-than-expected Eurozone producer price index before the euro stabilised in the second half of the week after the minutes from the ECB’s latest policy meeting showed there wasn’t unanimous support for the bank’s rate cut last month.
The single currency then closed the week on a positive note as it was underpinned by its negative correlation with the US dollar.
Volatility in the euro may remain pronounced this week following the second round of the French election.
While a surprise surge for the left in Sunday’s vote saw RN relegated to third place, the resulting hung parliament is stoking fear that political deadlock could disrupt Europe’s second-largest economy.