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. 

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 19^th 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.