ACM Update 08-07-24
Despite a landslide victory for Sir Keir Starmer’s Labour Party in the UK General Election, sterling saw an incredibly flat week against the Euro. In fact, the 24 hours of the election and results, saw only 0.2% worth of movement on the pair.
Economic eyes then shifted to US Non-Farm Payrolls data, which overperformed fractionally, but is beginning to slow. Sunday’s French election meanwhile ended up in somewhat of a stalemate.
This week sees the release of May’s GDP data and the latest round of US inflation, both arriving on Wednesday.
Rishi Sunak’s election gamble came to a disastrous end last week, with the incumbent Conservative Party being unceremoniously ousted in a landslide defeat. There were high profile defeats for many senior members, including an embarrassing defeat for former PM Liz Truss in her constituency. In fact, four of the five Tory Prime Ministers since 2010 (Cameron, May, Johnson & Truss) lost their seats.
The only one who didn’t was Rishi Sunak, who in managing to hold on to his own seat apologised to his fellow Tories, as he readied himself to move out of Number 10 on Friday morning. The days in the run-up saw the outgoing PM throw everything he could at the situation to try and prevent a Labour landslide, but inevitably it wasn’t enough to change the minds of the electorate.
There were also a number of other senior Conservatives falling, including Jacob Rees-Mogg, former defence secretary Grant Shapps and Leader of the House Penny Mourdant, who faced Sunak for the party leadership in 2022. Meanwhile, Nigel Farage became an MP at the eighth time of trying, for Reform UK.
So what did all of the above do to foreign exchange markets? Frankly very little. A Labour landslide was what had been predicted, and this was exactly what was delivered in the small hours of Friday morning. Sterling-Euro remained remarkably flat in the 24-hour period of the election itself, achieving barely 0.2% worth of movement from top to bottom. As flat a day as one can recall in a very long time, despite the political ramifications.
Aside from the election there was a handful of UK releases. We saw Manufacturing and Services PMI releases, with the former still showing growth but a fraction under the forecast figure. The ever-buoyant services sector meanwhile exceeded expectations.
In the UK housing market, mortgage approvals continue to be strong despite interest rates remaining high, as lenders gradually begin to reduce their offered rates. This comes despite Bank of England members remaining concerned that UK inflation will go back to 2.5% in the Autumn, potentially pushing back the long-awaited rate cut even further.
The movement last week (or lack of) on GBP-Euro can be seen in the chart below:
Naturally the biggest European headlines were surrounding the weekend’s second round of French elections. These delivered somewhat of a stalemate, leading to a hung parliament as none of the main alliances managed to obtain enough of a share to form a majority.
Normally this would be negative for a currency, but markets have deemed it the lesser of two evils, when compared to the potential of the far-right National Rally, getting into power. It seems that a week of what can only be described as “political chess” amongst all of the various parties, has let to a muddied picture.
The far-right National Rally party came third in Sunday’s second round, but are the largest individual party in France, with 125 seats. This is because the victorious left-wing alliance and Macron’s coalition will be fragmented. Alas, the political deal-making shall now continue, led by the left-wing Popular Front coalition.
In other Eurozone news, the latest CPI Flash Estimate for June came in at 2.5%, fractionally down from the 2.6% recorded last month. A positive sign for certain, but not the drastic progress that had been hoped for. More concerning was the simultaneous Core reading (which excludes energy, fuel, alcohol & tobacco) which failed to drop and remained at 2.9%.
On the topic of inflation, Christine Lagarde spoke a couple of times last week. She still doesn’t believe the ECB have sufficient evidence that inflation threats have passed for the bloc. This increases expectations for a hold in interest rates in their next meeting.
Conversation has now shifted to how many further cuts we are likely to see in 2024. Opinion seems split amongst the ECB committee though. Decision maker Yannis Stournaras thinks two more cuts this year would be “about right”. His fellow policymaker Pierre Wunsch however, would need to be “thoroughly convinced” that inflation is heading back to 2% this year, in order to cut rates a further two times.
Over in the US, aside from Joe Biden’s campaign trail being dominated by whether he should even be standing again or not, there were a number of significant market events. The latest Federal Reserve meeting minutes showed a similar picture to that of the ECB, with a requirement for greater evidence of inflation falling before being willing to look at rate cuts.
Jerome Powell also held a speech last week singing a similar tune to the above. He was willing to admit that the latest round of data suggests inflation is getting back under control, but pointed at a lack of evidence to show that this was a consistent enough trend.
Aside from that, it was the turn of the June US jobs market releases. The JOLTS Job openings data was first up, demonstrating an increased number of jobs available in the US, now at 8.14m. However, Friday’s Non-Farm Payrolls figure showed the number of jobs added to the economy last month was still strong at 205,000. The month before was also revised down considerably, suggesting the US is starting to slow down under the pressure of higher interest rates.
As a result, we have begun to see signs of Dollar weakness as interest rate cuts there begin to get closer and closer, despite what the Federal Reserve may be saying! As of this morning (Monday), we find ourselves at the highest position on GBP-USD since last summer.
Movements last week on the pair can be seen in the chat below:
The week ahead:
Monday – MPC Haskel speech (12:00 UK time)
Tuesday – BRC Retail Sales Monitor (00:01), Fed Powell testimony (15:00)
Wednesday – RBNZ rate announcement (03:00), BoE Pill speech (14:30), Fed Powell testimony (15:00), BoE Mann speech (16:30)
Thursday – UK GDP/Manufacturing/Construction (07:00), US CPI inflation (13:30)
Friday – US PPI inflation (13:30), Preliminary University of Michigan Consumer Sentiment (15:00)
As the fallout of the French election continues, the Eurozone is likely to have a somewhat troublesome week as it recovers from the events of the weekend. Despite what markets had viewed as the “worst outcome” not happening, the uncertainty and instability is unlikely to have a positive impact on the single currency until the position is clearer. The fact that there are no major Eurozone data releases this week, will mean there aren’t many distractions either.
On the UK side, sterling seems to have come out of its own elections in a fairly positive position. With a healthy Labour majority, it therefore remains to be seen how quickly the new Labour Government can make the changes they have been seeking to make.
A number of UK MPC member speeches will dominate the week. As always, anything hinting towards action at the next Bank of England meeting (now less than a month away) will be important. Federal Reserve Chairman, Jerome Powell, will find himself testifying in front of the House and Senate financial committees this week also. Such events can often generate questions which lead to monetary policy “hints” emerging.
For now, the picture remains volatile, especially for anyone needing to sell Euros or Dollars in the short term. Make sure to reach out to the team with any requirements you may have.
Have a great week.
