The polls got it wrong again. The UK is now proving to be a quagmire for the modern polling industry, and for currency markets to engage with.
The distrust of the polls themselves was evident in currency markets on polling day. The polls were showing the same margin of victory as Referendum Day, but on the day of polling the Pound wasn’t budging an inch. On Referendum day GBP/EUR as an example rose by over two cents in anticipation of the result. On this occasion, markets were sensible enough to wait for the exit polls.
This was when the Pound dropped. Rather than the final poll on the Thursday predicting a 40 seat Conservative Majority, we were suddenly expecting a Hung Parliament, and all the uncertainty this brings. This was only heightened by the fact that we have Brexit talks beginning later this month.
However, some rapid damage control by Theresa May calmed markets down on her informal affiliation with the DUP, it’s seemed continuity could be established.
Since then mostly we have seen stability in the marketplace. Whilst there has been volatility, GBP/EUR has kept within a range of 1 cent of so as one example, similarly GBP/USD at just over a cent since the initial Sterling drop. Effectively, this is now a market waiting for more news.
Conservative Minority Government
Due to the horrific fire in a London tower block last week, and the announcement of another terror attack on UK soil in Finsbury Park, further announcements on the government’s future affiliation with the DUP for them to form their Government has been delayed.
Markets have continuously flirted upwards when it seemed close to a significant announcement. We have seen Theresa May in front of the podium at Downing Street talking far too often of terror and tragedy, and understandably the political agenda is put on the back foot. The partnership however seems all but guaranteed. The official announcement of its formation should help the Pound, however, markets are much more avidly awaiting how policies will be changing.
Is the Brexit going to be softer? David Davis, the Brexit Secretary, has admitted as much that the result of the election calls into question the Conservatives mandate to push ahead with their original plans for a stronger break from EU affiliation.
Will markets react happily to this? It depends which features they are more amenable to keeping. Features which assist in access for UK companies to the single market, keeping the customs union for example is some which could trend well for Sterling.
We will have to wait for the Government to clarify their goals, it better be soon, negotiations have already started.
In this evolving situation, anyone with a requirement involving Sterling, should certainly be in contact with their account manager to avoid being caught out or missing an opportunity from sudden news hitting the marketplace. Your account manager can suggest options available to you, tailored to your situation, which could assist in dealing with uncertainty laden in the currency markets over the next few weeks.
A quick stop by the Euro now to appreciate the current, and may I say cleaner finish to an election, in France. The new French President, Emmanuel Macron now has the majority he needs to implement his pro-business reforms.
He plans to cut the number of public officials by 120,000 and cut the budget by as much as €60bn. As one of Europe’s largest economies, and one which is publically advertising its services as a gateway to Europe in the wake of the Brexit, such reforms should be received well. But he still has a strong fight on his hands.
We saw the Euro bump upwards with the result but this saga will continue. For now the Euro is benefitting from increased investment diverted from the UK and the US so we expect the single currency to remain fairly strong. With the next key election not until October in Germany, its likely most movement on Euro exchange rates will be governed by events outside of its borders.
The US recently raised their base interest rate for the second time this year, up to 1.25%, far ahead of the UK at 0.25%. This is keeping the US Dollar strong, but it could be stronger. The Russia scandal saw GBP/USD gradually move from the low 1.20’s up above 1.30 in the space of a month. This is an ongoing situation, which is why despite the US being the only major economy raising interest rates, we are not seeing the Dollar make major inroads against Sterling.
This is an evolving political situation which is continuing to dog the Trump White House, and with some softer economic data released of late from the US it seems unlikely that the US Dollar will be gaining much against the Pound off its own back. It would need some upsetting news from the Sterling side of the pairing in my opinion.
As such if those selling US Dollars would like to take advantage of historically high rates now the central level has dipped below 1.30 once more, you can contact your account manager directly for a live quote and a layout of your options.
Australian Dollar and New Zealand Dollar
The Australian and New Zealand Dollar have been some of the best performing currencies of 2017 so far. A resurgence in Chinese demand and growth, commodity prices flirting higher, and higher growth rates in both Australia and New Zealand are seeing both currencies benefitting heavily.
They are also seeing a lot of capital flow away from the US Dollar, with both currencies boasting a higher interest rate than the Dollar, and as it stands, greater likelihood of maintaining value.
For now the factors which have boosted both currencies seemingly have lost their momentum, rates have kept their shine but they are struggling to improve further.
Particularly for anyone holding NZD it may be worth securing an exchange rate now into Sterling, whilst rates are at some of their best levels since the turn of 2017.
If you would like to learn more about contract options, or have a requirement and wish to speak to an expert, please give us a call on 01494 725 353 or register your interest free here and one of our brokers will be in touch.