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Sterling on the Brink

Polls pointing to political catastrophe

 

The U.K. General Election taking place on June 8th, just over a week away, is being campaigned over in an almost surreal atmosphere. Polls show that what started with a result predicted as being the largest majority in modern times has now become a neck and neck dogfight with Brexit risks growing daily.

 

The pound has benefited from ample liquidity but has been volatile in relatively narrow ranges. Against the Euro it remains close to a six month low seen last Friday at 0.8750 but there is no underlying trend given selling interest into any perceived strength.

 

As recently as last Friday, Theresa May was seen as the most popular Prime Minister since the 1970’s with Jeremy Corbyn more unpopular than ever. It is hard to imagine that the electorate’s view on the leaders is so different from their view on the capability of their parties to govern.

 

The rise in social media where everyone is a journalist has led to a confused state with false news circulating as genuine, opinion and political affiliation clouding fact and the silent remaining, well, silent.

 

Brexit negotiations start on June 19th. Who will sit opposite Michel Barnier? That is the prize awaiting the winner on June 8th.

 

Euro still mired

 

It may be that for the next fifty years at least, the one size fits all” doctrine that pervades the Eurozone is the one constant factor.

 

This experiment, where nineteen diverse economies with separate fiscal, inflation and growth rates come together under a single monetary policy, cannot possibly work until each is able to work within the framework. This means Germany must live on the edge of an overheating economy. Italy and Spain should deal with not having currency devaluation as a way of creating export growth. And Greece? They will have to get used to being Governed from Brussels and Frankfurt.

 

Will this be the summer when Athens finally explodes? It could well be. Greeks are not known for their calm rational negotiating skills. It is a wonder that Tsipras has managed to keep a lid on things this long.

 

Yesterday’s inflation report from Germany provided Mario Draghi with some relief. It showed that year on year, inflation in Germany was 1.5% down from 2% in March. Tomorrow economic activity reports both for individual nations and the entire Eurozone collectively are likely to point to continued growth close to 1.8%.

 

Sr. Draghi, as he said on Monday, sees the need for “substantial” stimulus to maintain the status quo across the entire region. How he must be looking forward to his holidays!

 

Employment report to confirm rate hike

 

Haven’t we been here before? A sense of deja-vu permeates the wait for Friday’s U.S. employment report. A strong number, even if it is an anomaly, will push the FOMC closer to the third hike of 2017. I still don’t follow the significance of rate hikes in a calendar year. A rolling twelve-month period makes far more sense when looking at the economy.

 

Janet Yellen is cut from similar cloth to Mario Draghi. It wouldn’t pay to place a maverick in charge of any G7 central bank no matter the fun that could be had! Draghi, Yellen and let’s not forget Carney are conservative as befits central bankers. They are the stern parents dealing with the mischievous child, as represented by politicians, who wants everything now.

 

Yellen will be cautious about hiking rates again. The minutes of the previous FOMC meeting were in no way conclusive using the normal wait and see rhetoric. She won’t be used to having to make decisions based on political considerations but President Trump isn’t making anyone’s life easy! It is a tough call but interest rate futures are pricing in close to certainty for a June hike plus one more in 2017.

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