Published: June 26th, 2024
A research note published by HSBC this week says the surprise Summer election called by UK Prime Minister Rishi Sunak will have minimal impact on the Pound. The bank’s forex analysts are unconvinced that the result will alter GBP's long-term trajectory.
'Our view is that Sterling will be mainly influenced by rates in the second half of the year and remain on a path of slow but steady weakness over the coming months’.
Bank analysts say that consistent polling has the center-left Labour party ahead by a wide margin, and traders have begun factoring in the likely policy and economic outcomes of that result. Some believe a Labour government will be reflexively pro-EU, but there are questions about the impact that stance would have on GBP.
If a new government sought closer alignment on issues like common defense coordination or simplified travel rules, these would be seen as peripheral measures. If Westminster sought to rejoin the customer union, that would be a game changer. However, Labour has firmly ruled out anything that would be seen as a ‘betrayal’ of Brexit.
HSBC believes BoE interest rate policy will be more definitive for the Pound, but even on that measure, it would require the start of a new easing cycle before the bank's analysts begin reassessing GBP’s prospects reassessment of the currency."
The bank’s position was challenged by a Reuters analysis which points to. Sterling hitting its highest level against EUR since 2016. Bob Howard, a Reuters currency analyst, wrote this week that a return to post-Brexit highs could happen if the British and French elections deliver the right set of outcomes.
‘EUR/GBP could drop to 0.80 for the first time in eight years if Macron's liberal alliance loses a significant number of seats in the French parliamentary election at the same time the UK's pro-business Labour Party wins its expected majority next week’.
In June 2023 the Euro underwhelmed against all its G10 peers except for the Dollar in the last week of the month. EUR only rose in relation to the Brazilian Real, Turkish Lira and Chinese Renminbi on the broader G20 table, however some analysts believed it would remain a laggard for the near term.
EUR started experiencing losses when European Central Bank (ECB) President Christine Lagarde said interest rates would likely be raised again soon, at least until Frankfurt policymakers believed that their monetary decisions had become restrictive enough to send inflation back down to the central bank’s two per cent target.
The Euro experienced further declines when German state statistics agency Destatis announced that the country’s manufacturing orders fell more than 10 per cent in May, the biggest one-month decline since the onset of the pandemic. The print followed a Eurostat print which indicated that European retail sales dropped a full percentage point in the same month.
An analyst note from Nomura in London said that the broad EUR rally underway in early June was ‘done. EURUSD looked ready ‘to stick below 1.1100 and most EUR crosses have recently spun lower.’
Nomura added that investors were realizing the risk and may now be pricing-in a negative direction of travel, particularly as the ECB had unleashed its most hawkish monetary tightening on record. Traders were watching to see what the impact would be on the Eurozone’s real economy.
That made Europe's economic data calendar particularly important. A cascade of negative signals from the EU’s biggest economies could have triggered forex traders to reprice their outlook for ECB interest rates.
It's not the first time that EUR had been on the back foot against G10 peers in 2023. Forex analysts at MUFG said in February of last year that USD’s ongoing comeback wasn’t being hindered by risk-off sentiment, or trader concerns about signals from the US Fed’s open markets committee.
As investors shrugged off underwhelming PCE deflator data published the same week, MUFG said markets might be witnessing the return of Dollar dominance.
‘The upward adjustment to a higher terminal rate and cooling rate cut expectations for later in 2023 have spurred new life into the strong USD trade we saw at the end of 2022,’ says MUFG’s briefing.
Adding wind to USD’s sails was a lifting of investor expectations about the timing of the Federal Reserve's peak interest rate hiking cycle.
In January, consensus had the last rate rise set for March, but an additional two hikes have since been added to the table.
The likelihood of a rate cut in the latter part of 2023 receded, giving the Dollar support after an underwhelming end to 2022 and beginning to 2023.
EURUSD rushed toward 1.10 in January 2023 but fell back in early February as US economic data flummoxed analysts with mixed signals.
An unexpected blend of strong wage data, labour market dynamics, inflation figures and retail sales pointed to an American economy robust enough to achieve the Fed’s above-target inflation levels. EURUSD started to retrace previous gains as a result.
‘Stronger American growth data blended with firmer inflation at the beginning of 2023 has added optimism to markets. Forex traders are now pricing-in a more hawkish outlook for Fed policy’.
Going into March or 2022, spiking oil prices were pushing the Euro toward multi-year lows as forex traders bet that the European Central Bank would delay plans to raise interest rates later in the year.
Prices for Brent Crude surged above USD 130 per barrel in March 2022, the highest level for almost 13 years. Wholesale gas prices meanwhile more than doubled from the previous month on fears that the US and EU were considering an unequivocal ban on Russian oil.
The US did move forward with plans to ban purchases of Russian oil and gas, with other G7 countries following suit. European natural gas prices responded by hitting an all-time high.
In a note to investors, the FX Strategy unit at Crédit Agricole wrote that news of major Western importers considering coordinated sanctions against Russian energy exports sent oil and other commodity prices soaring, especially in Asia.