Political developments were dominating investors’ attention today with the outcome of British national elections and the effect on sterling being number one on the watch-list.
Less than two weeks’ time before Brexit negotiations get underway, UK Prime Minister Theresa May’s Conservative party lost its majority in the House of Commons. May’s call for snap elections was in the first place intended to give her a stronger hand in negotiating the nation’s exit from the EU and the outcome turned out to be what she least likely wished for, introducing an additional layer of uncertainty going forward. May is expected to gain Northern Ireland’s Democratic Unionist Party support in order to secure parliamentary majority and govern the nation.
Sterling tumbled as the polls hit the markets. Relative to the dollar it fell by almost two and a half cents to reach a low of $1.2704 from the $1.2950 level it traded before, reaching a near two-month low. At the same point in time, the euro recorded a steep rise relative to the pound, rising to as high as 88.24 pence from 86.54. Later in the day, euro/pound posted a seven-month high of 0.8858. By afternoon European trading hours the British currency managed to recover part of those losses but was still significantly down on the day relative to both the greenback and the euro.
The former FBI director Jamey Comey’s testimony before the US Senate was largely ignored by the currency markets despite him accusing President Donald Trump of lying and thus potentially diverting his administration’s attention from delivering on campaign promises, such as a tax system overhaul. The focus now shifts to the Federal Reserve’s policy meeting next week and predominantly on guidance on rate normalization moving forward, as a quarter percentage point interest rate hike seems to be already priced in by the markets. The CME Group’s 30-day Fed Fund futures prices currently reflect a more than 90% chance of that materializing.
Dealing away with the week’s risk events and being helped by rising US yields, the dollar index, a broader measure of dollar strength, opened with a gap higher that was mainly fueled by the greenback gaining versus the pound. The index was up by half a percent in late European trading hours at 97.38. Dollar/yen was last comfortably above the 110 level after starting the day slightly below it. Euro/dollar hit a more than one-week low of 1.1166 with the single currency building on negative momentum after the European Central Bank’s decision yesterday to cut its inflation forecasts and the Bank not being ready yet to reduce its monthly pace of asset purchases.
Turning to today’s data releases, UK industrial output numbers for the month of April showed output growing by 0.2% month-on-month, well below the 0.8% expected but above the 0.5% contraction in the previous month. Manufacturing output, a subset of industrial output, also grew by 0.2% on a monthly basis. Expectations were for growth to reach 0.9%, while March’s respective figure stood at -0.6%. Both manufacturing and industrial output experienced contraction in January and February as well. In other UK data, the nation’s goods trade deficit narrowed to 10.4 billion pounds in April with analysts expecting a 12.0bn deficit. Both exports and imports fell, with imports falling more sharply and thus resulting in a narrowing deficit. The pound didn’t have much of a reaction to the data.
In other releases, the Canadian economy added 54,500 jobs in May, far exceeding projections of 11,000 additions and April’s 3,200. The unemployment rate increased to 6.6% from 6.5% in the previous month, in line with expectations. The rise in the unemployment rate was attributed to more individuals entering the labor force (i.e. there was an increase in labor force participation), a positive for the economy. Also positive was the fact most positions added were full-time in nature. Dollar/loonie strongly reacted as the data hit the markets with the Canadian dollar gaining relative to its US counterpart. Specifically, dollar/loonie fell to as low as 1.3458 within a five-minute time frame of data release from 1.3511 previously. The pair was last further down at 1.3442.
Finishing with gold, as funds moved back into the dollar, the precious metal continued its retreat and looks set for a third straight daily decline. Today it recorded a one-week low of $1264.50 an ounce.