The pound has been supported by information regarding early election, as well as potential changes in speculation investors’ behavior in the futures market. The French risks are not included in the euro’s evaluation for the time being. The zloty remains stable against the main currencies. The pound is above the 5.05 level against the zloty.
Most important macro data (CET – Central European Time). Estimates of macro data are based on Bloomberg information, unless marked otherwise.
- No macro data that could significantly impact the analyzed currency pairs.
A crucial moment for the pound?
The pound’s significant strengthening yesterday was most likely a result of quite a specific situation within the United Kingdom, as well as of a unilateral position of speculation investors. It’s not often that calling for early elections in a relatively unstable environment is positive for currencies.
The main reason behind the pound’s strengthening is a hypothetical domination of the Conservative Party. Surveys have been giving them approximately 15-20% advantage over the Labor Party. According to The Financial Times, this would give them 387 of 650 places in the House of Commons, which is 56 places more than two years ago.
Such a large social support, as well as domination in the House of Commons, decreases the likelihood that the hardcore Brexit supporters within the parliament would grow significantly strong. This is because they may be dominated by a more pragmatic majority, which is focused around Prime Minister Theresa May.
However, this theory also has its flaws. Surveys change relatively rapidly and Brexit may be one of the crucial arguments when it comes to voting. If this supports liberal democrats or the Labor Party, the final result would be similar to the 2015 result. This would weaken the position of the British prime minister and could increase the uncertainty in the UK.
Yesterday’s move of the pound was most likely strengthened by the necessity of closing the positions in the futures market. According to the CFTC data, the amount of futures contracts set on the pound’s depreciation was approximately 100k higher than the amount of contracts that assumed the pound’s appreciation.
However, such unilateral behavior of speculators usually provokes the other side of the market to act. Currently, the capital set on the pound’s depreciation needs to be closed. The more sudden the opposite moves are, the larger the chance that positions set on depreciation will need to be closed. The matter of early elections was used to strengthen this move. However, this doesn’t have to be positive for the pound in the long-term.
Underestimated risk in France
Changes on the pound have caused significant consequences for the other assets. The USD has gone under depreciation pressure. This caused the EUR/USD to go above 1.0700. This has also caused depreciation pressure on the profitability of the US treasury bonds.
Therefore, the euro’s evaluation has become higher, despite an increasing danger of an unfavorable (for the market) result in the French presidential elections. Today’s survey for Le Monde (sample group: approximately 11,000 people) shows that Jean-Luc Melenchon may count for a 19% support. This increases the risk that he would make it to the second round (estimated support for Le Pen and for Marcon is at the level of 22.5% and 23%, respectively.) If both Melenchon and Le Pen make it to the second round, we would be dealing with a significant increase in risk aversion, combined with a few-percent wear-off of the euro.
Stabilization on zloty
The zloty remains relatively stable. The Polish currency was only volatile against the pound and the dollar. The PLN most likely is not evaluating the potentially negative impact of the French elections on the emerging market currencies, for the time being.
If Melechon and Le Pen make it to the second round, investors most likely would not wait for the final result of this election. This is because their economic views are relatively similar. Such scenario could not only wear of the euro, but also the zloty. Moreover, the dollar and the franc would rapidly become safe havens.