June 17, 2024

“Stay tuned, because political upheaval in France and four central bank decisions in the UK, Australia, Switzerland, and Norway set the stage for a bumper week in FX. Thursday’s Bank of England decision is key for the pound, with an election blackout and a last-minute CPI report raising the uncertainty.”

Sam Cornford – Head of Trading

 

Main Headlines

EU leaders convene in Brussels today for the first time since the recent EU Parliament elections to discuss the figures to be placed key positions as well as goals for policy over the next five years. Ursula von der Leyen is widely expected to hold her position as President of the European Commission, following further gains for the European People’s Party.

In Britain, three election opinion polls released yesterday showed that the Conservative Party continues to trail Labour by a heavy margin, with the political research director at Savanta warning that the Conservatives could face ‘electoral extinction’ after Labour posted a 25-point lead.

GBP

Amid political turmoil on the continent, sterling notched its fifth consecutive weekly gain against the euro last week but suffered against the safe-haven dollar. While France should continue to exert a heavy influence this week, a last-minute inflation report and Thursday’s Bank of England decision will be most important for the pound domestically. The 5.9% services inflation figure for April and the proximity to the election are the primary reasons that policymakers are expected to stay on hold – markets have slapped the meeting with a mere 5% chance of a rate cut – but an election-related BoE speaker blackout has left markets in the dark about voting intentions, and a downside surprise on Wednesday’s CPI report could quickly shift the dial if services inflation is back on track.

On the election side, it’s interesting to note that debate around the UK-EU relationship is finally beginning to gain traction among the contending parties, an improvement in which down the line could help to unwind the so-called ‘Brexit premium’ that has dogged the pound since 2016. Labour Shadow Chancellor Reeves said that Labour would look to improve the relationship, while Liberal Democrats leader Davey argued that his party would look to rejoin the single market.

EUR

The euro is wallowing at a one-month low this morning after its biggest fall against the dollar in two months. More French polls at the weekend pointed to a healthy lead for Le Pen’s RN, and the current path of least resistance in markets is evidently for higher French yields and a weaker euro, with markets become increasingly cautious about holding the common currency as concerns about the French debt pile and a more fractured eurozone mount. Politics is the natural short-term driver for the euro right now and the polls will be particularly important now that a leftist alliance threatens Macron even further, but the ZEW economic sentiment indicator tomorrow and the PMIs on Friday should also provide fresh clues on the economic outlook this week.

USD

In a vacuum, the dollar should have performed poorly last week by all accounts, yet its safe-haven appeal lifted it to a one-month high as political turmoil knocked the euro. The Fed did trim their expectations for rate cuts this year to just one, but both the CPI and PPI inflation gauges printed below expectations, and US yields fell as rate cut bets rose for September – that is a bearish picture, and outlines the extent to which the euro could have suffered if the US dollar had gained some domestic strength.

It’s a rarity, but it’s not the US data in the spotlight this week. Tuesday’s retail sales are expected to recover from the 0.0% April print to 0.3%, and the consensus is for a slightly softer set of PMI figures on Friday after a surge in May.

Markets

Last week saw a stark divergence in stock fortunes in the US and Europe. While renewed rate cut hopes in the US sent the S&P 500 and the Nasdaq to record highs, European stocks swallowed their worst weekly performance of 2024 so far as markets digested bond turmoil in France ahead of the snap general election. France’s CAC 40 dropped 6% to its lowest level since January.

Main Economic Events (All Times CET)

1:01am: UK Rightmove House Price Index
4:00am: Chinese Industrial Production and Retail Sales
2:30pm: US Empire State Manufacturing Index

 

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