GBP May be ok but euro in ascendency

The pound is pulling back at the European open although it remains within its post election range and has managed to stay above the GBP/USD low of 1.2636 made on Friday. The government is fragile, Theresa May still hasn’t secured a formal “agreement” with the DUP, she has to meet the incredibly popular Emmanuel Macron later today and she still has to pass a Queen’s Speech in Parliament next week that is necessary to give her the right to rule.

The pound is pulling back at the European open although it remains within its post election range and has managed to stay above the GBP/USD low of 1.2636 made on Friday. The government is fragile, Theresa May still hasn’t secured a formal “agreement” with the DUP, she has to meet the incredibly popular Emmanuel Macron later today and she still has to pass a Queen’s Speech in Parliament next week that is necessary to give her the right to rule. 

A working government is no guarantee of pound success

The political risks are mounting, however, the pound remains stable after Friday’s initial sell off. But it is worth remembering that back in 2010, GBP/USD managed to sell off more than 7% after the May election, even though the Conservatives and Liberal Democrats managed to form a working coalition relatively quickly. Thus, the direction of GBP in the future is still very much up in the air.

Brexit is the key differentiator with 2010. The prospect of a hard split with the EU has been kryptonite for the pound, so a potential rethink on the UK government’s Brexit stance could limit GBP downside, at least for now. However, not even the rising odds of a soft Brexit have been enough to spark positive momentum for the pound. Sterling appears to be in a holding pattern, volatility remains subdued, which could limit GBP movement in the run up to the Brexit negotiations, which resume on 19th June.

Euro looks strong and stable as we move into summer

The UK may do well to look to France, where President Macron is expected to see his new En Marche! party do well in the first round of the National Assembly elections. From an FX perspective the euro is starting to look strong and stable: it has growth, subdued political risk, and a potential wavering ECB on its side. This could be a good summer for the euro at the expense of the dollar and the pound. It looks increasingly like Europe has its house in order, and the Anglo-US world order looks like it is heading for the cliff edge. What this shift will look like we don’t know, but we do know that this drama will be played out in the currency market, and right now the euro looks like it is in the ascendency. 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.