Originally published by Rivkin Securities
The euro strengthened on Thursday, rising +0.52% against the US dollar and +0.26% against the pound shown on the first chart below, despite a slightly larger than anticipated drop in inflation as the unemployment rate declined more than expected. Headline inflation across the Euro-zone rose +1.4% year-on-year, down from +1.9% and lower than the expected +1.5% while the core measure was in line with forecasts, decreasing to +1.0% from +1.2% previously. This should provide further breathing room for ECB doves who have been arguing the case for continued monetary support highlighting that price pressures do not yet show any signs of sustained upwards momentum.
However this was offset by a decrease in the unemployment rate to +9.3% from +9.5% previously and forecasts for a reading of +9.4%. This is seen as continuing the theme of a broadening recovery across the Euro-zone and a gradually tightening labour market should eventually lead to gains in wages and in turn inflation.
UK bond yields spiked on Wednesday as politics remained in focus with a new YouGov poll suggesting the Tory lead over Labour narrowed to just 3 points causing both the two-year and 10-year UK yields to jump +4.1 and +6.1 basis points respectively and the pound dropped -0.26% against the euro. The YouGov is in contrast to other polling that puts the Tories in front, ranging between 5-14 points and YouGov have stated they acknowledge there is a larger margin of error as a result of how their polls are compiled. Still some are pointing to the pollster’s success in consistently pointing to a Leave vote in the Brexit referendum as well as Hilary Clinton winning the popular vote during the US elections.
The snap UK election on June 8th will have considerable impacts on Brexit negotiations. PM Theresa May is aiming to strengthen her majority in government and therefore strengthening her negotiating stance during Brexit and removing the political risk associated with implementing any Brexit deal as elections will not be held until 2022 as opposed to 2020 just after Brexit negotiations conclude.
A decisive victory by the Tories, increasing their lead to over 50 seats would likely see the Pound strengthen, failure to expand on the current 12 seat majority would be seen as Pound negative as would failure to secure a majority at all that would likely result in a hung parliament and the formation of a coalition. The formation of a coalition government could result in the eventual PM being influenced by more hard-line Brexiters. Markets prefer certainty and the best case scenario is for a decisive Tory victory while a hung parliament would be a worst case outcome resulting in investors having to rethink the outcome of Brexit negotiations.
Regardless of the outcome Brexit will still proceed with both leaders of the Tories and Labour having vowed to follow through on the Brexit referendum. The desired outcome from negotiations however differ with Labour leader Jeremy Corbyn adopting a softer stance, promising to immediately guarantee the rights of EU workers living in the UK and that a deal would be reached seeking to maximise the UK’s access to the single market as opposed to Theresa May’s “no deal at all is better than a bad deal”.
Data Releases:
· Australian CoreLogic House Prices (MoM May) 10:00am AEDT
· Australian Private Capital Expenditure (QoQ Q1) 11:30am AEDT
· Australian Retail Sales (MoM Apr) 11:30am AEDT
· UK Nationwide House Prices (MoM & YoY May) 4:00pm AEDT
· Euro-zone Manufacturing PMI (MoM May) 6:00pm AEDT
· Fed’s Powell Speaks On Policy Normalisation 10:00pm AEDT
· US ADP Employment (MoM May) 10:15am AEDT
· US ISM Manufacturing (MoM May) 12:00am AEDT
· US Crude Oil Inventories (May 26th) 1:00am AEDT
Chart 1 – EUR/USD (Blue) & EUR/GBP (Purple)
