Markets are a fickle place at the best of times but when uncertainty comes into the equation, they can behave in erratic ways. The best example I can give of this in the last couple of months was when we saw Donald Trump elected as President of the United States and both equities and the dollar plummeted initially, only to rebound a couple of hours later. While this ricochet reaction to Trump’s triumph may have been premature, you can understand the markets reasons behind it, based on his promise of lower taxes and increased spending.
Today in the UK however, it is difficult to see the pound rebounding anytime soon based on the fact that markets are still unsure of what’s what. We went from a situation where, less than 5 weeks ago the UK held local elections and the Conservatives gained more than 550 council seats, while Labour had its worst result since the 1990s losing more than 380 seats. This local election result saw analysts forecasting the Conservatives taking up to 399 seats in the general election, far more than the 326 seats required, resulting in a rebound in the pound. Fast forward to today however, and we have a very different scenario. We still face the prospect of a hung parliament if this weekend’s comments from the DUP are to be believed.
May could find herself under increasing pressure in the coming days after a petition which gathered close to a million signatures to block a Tory-DUP government. Will she stick to her Brexit rhetoric of “no deal is better than a bad deal”? With Brexit talks scheduled to start next week, the UK couldn’t find itself in a worse position.
Before this however, we get an opportunity to see if economic data from the UK can help cover some of these cracks. This week we have the latest inflation, wages, retail sales and unemployment data. While not trying to come across overly negative on the UK as we have seen some strong data, particularly in the manufacturing data where the lower pound has aided this sector. However, credit card company Visa released figures over the weekend showing UK consumer spending fall for the first time in nearly 4 years, we’ll have to wait and see if this has any impact on the retail figure this week.
Over in the US, where equity markets and the dollar have mostly priced in the Fed raising rates this week, a survey conducted by Bloomberg also showed economists forecasting another hike in September, while also predicting that the Fed will start to shrink its 4.5 trillion balance sheet in Q4. While we have seen inflation figures stateside come off somewhat, this hasn’t deterred forecaster’s expectations.
In the currency market GBPUSD continues to trade in the 1.27 area, a break below here opens the door to 1.25 region while a break above 1.2830 sees potential for 1.29. While EURGBP is trading just off the highest levels we’ve seen this year and currently above the .88 level.