Sterling shines as UK electorate hands Conservatives unexpected outright majority
11/May/2015 • Currency Updates•
Political news was the main driver of market moves last week among major currencies, overshadowing economic releases. Of course, the main news for the week was the Conservative victory in the UK elections that will enable it to govern without support from any other parties. Markets welcomed the dissipation of uncertainty and sent Sterling soaring over 2% for the week against both the US Dollar and the Euro. Moderately good news from the US payroll report on Friday enabled the Greenback to recover its losses against the common currency and end the week exactly unchanged against the Euro.
It was also a very good week for Scandinavian currencies. The Swedish Krona rose on the back of stronger than expected industrial production and business sentiment, while the Norwegian currency benefited from a less dovish than expected Norges Bank, which left rates unchanged and hinted that further easing of monetary policy may be very modest.
Elections in the UK delivered an unexpected result. Contrary to all polls, the Conservatives secured an outright majority. The fears over protracted negotiations to build a coalition, and the possibility of new elections, disappeared as soon as exit polls were published Thursday night, and Sterling immediately soared on the news against every other major currency.
The news is not entirely positive for the Pound, as it makes it very likely that there will be a referendum on European Union membership by 2017. However, currency markets are seldom able to look that far into the future. At any rate, other news last week was also Sterling positive, as the services PMI business sentiment indicator delivered another strong surprise.
This weeks’ quarterly Inflation Report from the Bank of England will be key to gauge whether our view of a hike in the first quarter of 2016 is in line with the MPC’s.
Last week was a light one in terms of key macroeconomic news from the Eurozone.
The slight upward revision to April’s composite business sentiment index still left it consistent with 2% annualized GDP growth. More mixed news came from the consumer sector, as retail sales dropped in Mach by 0.8% and the previous figures were revised lower. However, these setbacks come after very strong numbers, and therefore, as yet, we see no reason to revise our forecast for modest acceleration of economic growth to 2-2.5% during 2015.
As for the Greece situation, as always mixed and confusing signals from the various players, but overall, optimism that an agreement seems to prevail. We note also that Greek tax collection has come in better than planned in spite of the uncertainty, and the Greek Government has managed to defy the doomsayers so far and meet all of its financial commitments in spite of the lack of an agreement with European institutions.
All eyes were fixed on the payroll report on Friday.
It proved to be a less than dramatic event, and was overshadowed by the UK election results the day before. The release appeared to confirm that the first quarter slowdown in the US was primarily a consequence of the harsh weather. Job creation returned to the 200-250k level where it had been for most of the past year, and unemployment dropped again to 5.4%.
There were some signs of softness in the wage growth numbers, and therefore we are revising our call for the first Federal Reserve hike to July of 2015 rather than June. However, this is still earlier than markets have priced in. As markets re-price their expectations, rates should rise and keep the Dollar well supported against most major currencies.