Balance of Risks Halts Sterling

Sterling drifting on a sea of sadness

The events of Monday evening have had a profound effect on the entire population of the U.K.

In typical fashion, a stoic resistance has formed and life will gradually return to normal. Or as close to normal as it can when another piece of the nation’s willingness to accept a multi-racial, multi-cultural society has been chipped away.

 

Equilibrium Rules.

The market has reached a hiatus for the pound which has been exacerbated by the suspension of election campaigning.

Monday’s terror attack has been met with a swift response from the Government and security forces although the threat level remains heightened.

The pound has fallen against both the dollar and euro although these falls can be seen as corrective following a 4% rise against the dollar. During May, the Euro has risen from a low of 0.8383 to 0.8677 as political concerns have evaporated following the French Presidential election.

A Conservative Party victory in next month’s General Election is likely priced in so the economy and Brexit will be the major drivers of the pound going forward. It has been made evident that, for now, the timing of a change to monetary policy in the U.K. is some way into the future. Inflation will continue to be a concern and the CPI data due for release on 13th June will be eagerly expected.

 

Euro remains strong

The single currency is benefitting from a period where there is nothing negative to say, even for a Eurosceptic like me!

Political concerns have dissipated, the economy is starting to grow and even Brussels appears to have agreed a policy towards Brexit. That policy may be “we want everything and no concessions will be considered”, but it is a policy nonetheless.

The E.U. Commission or Council or Parliament or whoever agrees these things sees no reason to concede any ground at all to the U.K. since it is them who wants to leave the cosy warm cuddly E.U.

Since this is an unprecedented event, the reaction of the currency market will be intriguing.

Clearly, the single market will be the most important matter since this is the common link to all matters. Free movement of people, goods, services and capital is at the centre of the E.U.’s primary tenet and will be negotiated aggressively. It is just the “people part” that will be the sticking point for the U.K. Like a cold war drama, we have some of theirs, they have some of ours, so a sensible approach will be needed.

 

FOMC Minutes a mixed bag.

The major downside of waiting three weeks before releasing the minutes of the FOMC Meeting is that the comments and conclusions could have become redundant.

That is clearly the case with the minutes of the May 2/3 meeting. President Trump’s “Russiagate” issues and his conflict with congress over the sacking of James Comey have superseded the Fed’s view on the economy.

Coincidentally, there was concern expressed about the continued strength of the employment market. March’s data had been weak and the revision in April was to make it even lower (98k to 79k). It was agreed to wait and see what happened with May’s report to decide on another hike. Since the meeting isn’t until 13/14 June, such a comment is superfluous as the May data will be released on June 2nd!

The market is pricing in a 75% chance of a rate hike in June. That is down from 80% last week. The chances of two more hikes in 2017 have now fallen below 50%.