Market News & Insights
5 June 2017

Pound Holds Firm In The Face of Pressure

GBP dropped last night when markets opened but like London and the rest UK, the pound will remain resilient and has since pulled itself back higher to where it closed on Friday. It feels all too common now that we are discussing these acts of cowardice, and while markets show some reaction to the initial fear, they quickly shrug it off and go back to business. That is the story on GBP today and while many have called for this week’s election to be postponed, in reality it is extremely unlikely unless the situation escalates further. The pound will be focused on this week’s elections and will continue to be vulnerable to volatility around headlines.

The USD was weaker on Friday following a disappointing NFP report. The headline figure missed to the downside with 138k jobs vs 182k expected. Earnings were also to the downside of expectations as wage growth slipped to 2.5% vs the 2.6% expected. There were also downward revisions to last month’s figures as well and the USD now holds in a perilous place and at levels not seen since last October (with the exception of the USD election day were the USD index covered 3.5% range). The weaker labour market data did not hurt optimism in markets however as all major US indices closed at record levels. Elsewhere in the world, Qatar has seen several nations cut diplomatic ties with them over accusations Qatar backs Islamic militant groups.

The Euro has remained near 8 months highs against the USD, while EURGBP traded to fresh 3 month highs on Friday. This week however, will be key for the single currency with the ECB due out on Thursday. Markets will be looking for hawkist rhetoric from the central bank. At a minimum we’d need to hear comments about the removal of additional easing and if the Euro is to extend its rally higher, it would need some comments on scaling back their current program before it ends in December.

We’ve highlighted that the Euro’s rally could be coming to an end unless the ECB deliver what markets are expecting. We’ve had mixed PMI’s released this morning from the Eurozone and thus far we’ve seen some moderate Euro selling. 1.1285 currently offers resistance to moves higher, while 1.1256 and 1.1200 area offer some light support for buyers. EURGBP managed a close above .8736 on Friday and the weaker pound saw .8771 trade overnight when markets opened but we’re back around .8750 now and this area remains critical. EUR sellers still trying to keep us below that level but we’ll see if they have enough backing to turn the pair lower again.

The UK’s general election takes place on Friday and the Conservatives still appear to maintain a commanding lead, if we are to put much faith in the polls. Depending where you look, the Conservatives have from a 1% lead to a 12% lead as we enter election week. We’ve seen from recent elections both in the UK and abroad, that the tail risks around outcomes have been difficult to quantify, thus we are just not seeing pre-positioning in markets from a speculative front, we have however been seeing an uptick in corporates looking to hedge risks.

UK services data just released was to the weak side. The weakest reading we’ve seen since Feb although the reaction was relatively muted. However given we’ve seen a shift in post Brexit UK activity, perhaps weaker services but growing construction and manufacturing will now be the new norm.