Sterling in the post election
Following its post-election trashing, sterling did reasonably well, strengthening by two thirds of a cent on the week. It was not easy going but the Bank of England did its bit to help. The Monetary Policy Committee kept the Bank Rate unchanged at 0.25% but three of the eight members voted for an increase against an expected 7-1 vote. That came as a surprise to investors and they marked up the pound.
Bank of England Governor Mark Carney spoke at Mansion House in London yesterday, in his speech he explained the time is not right for an interest rate rise. He wants to see how the Brexit negotiations unfold in the coming months, at the moment “given the mixed signals on consumer spending and investment” we need to wait and see how the future unfolds. Since the referendum the markets have sold off sterling, making the currency weaker and thereby increasing inflation in the UK.
“Before long, we will all begin to find out the extent to which Brexit is a gentle stroll along a smooth path to a land of cake and consumption.”
The Brexit negations began yesterday
UK Secretary of State for Exiting the European Union, David Davis, began the Brexit negations yesterday with a face to face meeting, looking for a ‘strong and special partnership’ with the remaining members. The initial exchanges seemed promising as they set out an orderly process for negotiations. Although the reaction was very limited in the currency markets, they are still hoping for the government to adopt a softer approach to Brexit. Meanwhile there were various comments in the papers- most notably from Tim Farron the former Lib Dem Leader who claims Davis has capitulated on day one! Whereas David Davis defends his position “It’s not how it starts, it’s how it finishes that matters,” he said in Brussels. “Nothing is agreed until everything is agreed.”
US interest rates driving the dollar
The US Dollar hit a three-week high following a renewed focus on interest rates in the US, the FOMC raised rates by 25 basis points however, unlike BOE, the FED move was expected. There is an interesting debate going on for those macroeconomists out there over the value of tightening in the US with the general absence of inflation, a Federal Reserve official said U.S inflation would pick up as wages improved, pointing towards the FED continuing to raise interest rates.
Quiet week for the euro
The Euro on the other hand is riding high on the Macron majority. The party of Emanuel Macron, France’s new president put in a good showing in the first round of voting for the legislature and the European Council approved the latest round of Greece’s bailout finance. From an economic point of view it was a quiet week for the euro. Industrial production in the euro zone was up by 1.4% on the year and 1.5% more people had jobs. April’s trade surplus was smaller than forecast.
On a final note
Sterling remains vulnerable to domestic political instability and this week we have more speeches from Central Banks including: The Bank of England, The UK Chancellor, The FOMC and the Swiss National Bank as well as ongoing Brexit and Conservative/ DUP Talks to contend with.
Sarah, Senior Account Manager at Moneycorp
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