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Currency Market Analysis

May 23, 2019 | Currency Market Analysis

Global Themes

Sterling's slump continues, politics in spotlight
- European elections in UK today
- GBP/EUR endures its longest losing streak since 1999
- Euro firms ahead of data-packed day
- Trade war woes outweigh Fed minutes

European elections in UK today
Voting in the European elections kicks off in the UK and the Netherlands today. Other countries vote through to Sunday when the results will be revealed. Investors worry that the rise in anti-EU parties and populism will weaken the Euro. The common currency remains vulnerable to downside risk versus the US Dollar. Sterling, however, appears even more unattractive as GBP/EUR continues to slide amid Brexit jitters and political chaos.

The Brexit Party is forecast to win the biggest share of the UK’s 73 seats, which could have negative implications for the pound. An aggregate of all available national polls suggests the Brexit Party will win 25 seats; a 34.4% share compared to Labour’s projected 15 seats, closely followed by the Liberal Democrat’s 12 seats. The Conservative Party look set for an embarrassing performance, with just 7 seats projected. A big victory for the Brexit Party points towards a hard Brexit and potentially a “no-deal” scenario. The rising probability of such an outcome has historically weakened Sterling and is one reason why the pound has depreciated over 3% across the board this month.

This EU election is being perceived as a proxy second EU referendum for the UK. Therefore, the results on Sunday may trigger currency volatility into next week should any surprises arise. A bank holiday in the UK on Monday also increases the risk of more aggressive currency moves due to less liquidity in the market.

GBP

GBP/EUR endures its longest losing streak since 1999
Sterling fell to fresh 4-month lows against both the Euro and US Dollar yesterday as rumours of Prime Minister Theresa May being forced out of leadership continued to swell. GBP/EUR has fallen for 13 days straight, its longest daily losing streak since the creation of the Euro in 1999.

Another day, another Brexit battle for Prime Minister Theresa May. The PM is now facing a cabinet revolt as ministers plot to force her to step down after she failed to persuade UK lawmakers to support her tweaked Brexit deal. The 1922 committee of backbench Conservative MPs decided against changing party rules to allow another vote of confidence in PM May, although the chair of the committee and the PM are expected to meet on Friday after the European elections. The resignation of Andrea Leadsom, now former leader of the House of Commons, wrapped up another tumultuous day in UK politics, and the pound suffered yet another day of losses as a result. Brace for potentially more resignations today, which could drag Sterling lower.

Despite PM May offering an opportunity for a second referendum if MPs voted to support her Brexit deal, the pound nearly tumbled below €1.13 and $1.26 versus the Euro and dollar respectively. These levels could give way today though as political uncertainty mounts.

EUR

Euro firms ahead of data-packed day
An influx of European economic data drops in this morning, which could potentially influence the Euro’s value. The lacklustre state of the Eurozone economy continues to unnerve investors and is adding to the downward pressure on EUR/USD, which lingers near $1.11,  its 2-year floor.

Final German GDP results for the first quarter of the year have already been released and revealed Europe’s biggest economy expanded 0.4% q/q after Germany narrowly avoided a recession in Q4 2018. Next up is the key German IFO survey at 9:00am, with bullish euro traders hoping to see an improvement in the German business climate. Provisional PMIs for this month will also be released at 9:00am with attention on the manufacturing sector, which remains in contraction amidst slowing global demand and rising trade tensions.

The European Central Bank (ECB) will also publish the minutes of its April policy meeting this afternoon. Focus will be on any signals of further stimulus measures to be implemented to combat growth and inflation risks in the Eurozone.

USD

Trade war woes outweigh Fed minutes
Amidst ongoing political turmoil and rising trade tensions, the US Federal Reserve’s (Fed) minutes were largely overlooked last night. The US Dollar remained supported by safe-haven demand flows as market sentiment soured.

The Fed’s minutes of its May policy meeting offered no surprises other than the market potentially mispricing a full rate cut by the end of 2019. Inflation concerns remain transitory and downside risks are fading. It’s worth noting that the Fed had expected a trade deal between the US and China, so with the breakdown in negotiations and increase in tariffs by both sides, additional commentary by Fed members will be closely monitored. Today, risk appetite remains soft as reports last night revealed the US urged South Korean companies to reject Huawei’s products. As tensions ramp up, we could witness greater demand for the safe-haven Japanese Yen and higher-yielding US Dollar.

GBP/JPY has fallen through ¥139 this morning, a fresh 4 ½-month low. Even the Antipodeans (AUD and NZD), which often depreciate in times of risk aversion, are up against the pound. This highlights just how bearish (to bet against) traders are on Sterling.


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