Sterling soars after Theresa May calls for snap election

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19 April 2017

thomasdodds

The Pound soared against all of its major peers on Tuesday after UK Prime Minister Theresa May unexpectedly announced she would be seeking to hold a snap General Election in June.

S
terling was easily the best performing major currency in the world yesterday, rallying by over two percent against the US Dollar to its strongest position since October (Figure 1).

Figure 1: GBP/USD (17/04/17 – 19/04/17)

Yesterday morning’s surprise announcement was welcomed by markets. The Conservatives currently have a comfortable lead in the latest opinion polls, with an average of the five most recent polls giving them a 43% to 25% advantage over Labour. The election could strengthen May’s stance within her own party and may give the Prime Minister a firmer footing in negotiations with the European Union. We think this improves the likelihood of a ‘softer’ Brexit, something that could prove a significant long term positive for Sterling which remains undervalued by almost every measure. The election will take place on 8 June should Labour and the SNP Party vote in favour of new elections, as expected.

Meanwhile, the US Dollar remained under pressure for the second straight day, with growing optimism of a softer Brexit also helping lift the Euro to its highest position since the end of March. Investors also remain concerned about ongoing economic talks between the US and Japan, particularly off the back of Donald Trump’s recent protectionist comments that complained about other nations artificially weakening their currency.

Updated inflation data in the Eurozone this morning will be the main focal point of trading today, although is expected to remain unrevised.

Major currencies in detail

GBP

The Pound approached the 1.28 level against the US Dollar on Tuesday, while rallying back above 1.19 to the Euro following Theresa May’s announcement yesterday.

The prospect of a much earlier than expected election caught the market by surprise, although has generally been viewed as a significant long term positive for the Pound given it lessens the likelihood of a ‘hard Brexit’. We have been saying for a while that the market is continuing to price in the worst case scenario to negotiations, and yesterday’s news further justifies our forecasts for Sterling strength.

Sterling will continue to be driven by political factors today, with no economic announcements scheduled. Governor of the Bank of England Mark Carney will be speaking in Washington on Thursday evening.

EUR

The Euro soared back above the 1.07 level against the US Dollar yesterday, buoyed by the prospect of a slightly softer Brexit, given the UK’s characteristic as the second largest economy within the European Union.

Tuesday was a fairly quiet day of announcements within the Eurozone. Attention remains firmly fixated on the French Presidential Election this weekend. The latest first round polls now give Emmanuel Macron a very narrow advantage over National Front leader Marine Le Pen. The possibility of a Le Pen victory, while remote, remains a key issue for Euro traders.

Inflation data will be released at 10am this morning. The monthly business activity PMIs on Friday are likely to be the main economic data release this week.

USD

The Dollar fell to its lowest level since the end of March yesterday, with last week’s poor data continuing to weigh on the greenback. The market probability of higher rates in the US at the June meeting has subsequently fallen to around 40% from closer to 60%.

Economic data out of the US yesterday went mostly under the radar. Housing data was fairly mixed, with housing starts coming in well below expectations. Housing starts fell by 6.8% to an annual rate of 1.22 million units, although building permits for the same month actually rose to 1.26 million from a revised 1.216 million.

With no economic data releases today, investors will turn their attention to Thursday’s speech by US Treasury Secretary Steven Mnuchin.