The downward pressure on the sterling may remain strong despite a calm trading session at the beginning of the week. The French parliamentary election won by Macron’s party. The zloty remains fairly stable to major currencies. The EUR/PLN is slightly below 4.20.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.
- No major economic data that may significantly affect the analysed pairs.
Many issues from the pound
The trading of the pound at the beginning of the week seems to be relatively calm. The GBP/USD is around 1.2700. Moreover the sterling valuation against the euro looks to be fairly high taking into the account problems which may be faced by the UK in the foreseeable future.
Beginning with positive information, some market participants are seeking to position themselves toward a soft Brexit due the impressive rebound of the Labour Party and the coalition with the Northern Ireland Democratic Unionist Party (DUP). This type of scenario is unlikely in the current situation. The risks of another election, difficulties to form a stable coalition or a more radical Tories stance may soon become a reality.
Moody’s released a statement today that the election results are “credit negative for the UK.” The rating agency claims that the election will “increase fiscal risks and hamper Brexit talks.” Moody’s also sees that the Conservative Party “is expected to form a minority government with the Democratic Unionist Party’s support without a formal coalition or pact” and further elections in the next month “remain a distinct possibility.”
Similar findings were also presented by Fitch. The rating agency believes that the election results “create uncertainty over policy platform, political cohesion and longevity of the next UK government.” Currently, no concession regarding a Brexit stance is expected to come from Tory leaders. The UK Brexit secretary, David Davis, said that, “I’m getting on with leaving the EU single market” and “have to prepare for the option of a no Brexit deal.”
In conclusion, despite that the pound volatility eased somewhat, it is really hard to build a positive scenario for the sterling. Conservatives may have problems withdrawing from their tough stance regarding Brexit. On the other hand, if it turned out that support for the Tories starts to abate and the risk of further elections increases, then we would have to deal with a few months of uncertainty that would not necessarily end with any breakthroughs. As a result, the UK economy will remain in a state of "suspension" and "uncertainty" that should cause downward pressure on the pound rather than allow it to rebound.
Solid victory for Macron party
After the first round of the parliamentary election in France, the Emmanuel Macron party, along with its center-left coalition partner, won 32.3 percent of votes. It is about 2-3 percentage points above the most recent polls. Second in the race were the Republicans, who lost more than 13 percentage points to the leader. As a result, the Macron coalition can earn 415-455 of 577 seats in the lower house of the French parliament according to the Ipsos projection.
Solid result for the Macron party should paint a more favourable picture for the region. The market can therefore assess this as an opportunity to improve France's competitiveness and its positive contribution to the stability of the eurozone. Today there was no positive reaction to these events, and the element of political stabilization in the region can also improve the perception of the European currency by global investors.
Stable on the zloty
The PLN volatility still remains fairly low. Despite that the zloty strengthened somewhat in the morning (EUR/PLN 4.1800), and then weakened to 4.1900-4.1950 against the euro around midday, the moves are limited. In the next several hours, the Polish currency should remain fairly stable with limited moves in either direction.
More uncertainty and volatility can be expected on Wednesday when the FOMC meeting is scheduled. The market still expects a limited number of hikes after June rate increase. Should FOMC maintain March’s projections regarding interest rate hikes, the dollar could gain in value and zloty, on the other hand, could depreciate. This should push the PLN basket lower, but the odds for the USD/PLN to exceed the 3.80 mark will remain low even in a fairly hawkish Fed.