27 May 2019: May’s resignation drives Sterling higher

27 May 2019: May’s resignation drives Sterling higher

May’s resignation drives Sterling higher

May 27th: Highlights

  • Main Parties suffer in EU elections
  • EU sees gains for nationalists
  • Trump moves on to challenge Japan on trade

No uniting leadership candidate emerging

Theresa May’s announcement that she will resign as Leader of the Conservative Party on June 7th caused the pound to break its recent sequence of successive lower closes. It is hard to see why the pound would rally in such circumstances since it brings the markets no deal fears closer to reality.

It is ironic that Mrs May has had to wait until June 7th to accommodate the visit of President Trump a few days prior.

Several MPs have said they will contest the leadership election and the fight is set to be defined by those who favour a hard Brexit and those from a softer more conciliatory group.

Boris Johnson, the current frontrunner, softened his stance in a speech over the weekend, saying that there must be a better way than no deal but it is important to keep all options open.

As was generally expected, the two main parties performed badly in the EU elections which are being seen by many as no more than a proxy referendum on Brexit. The Brexit Party, who campaigned on a platform aimed at hard Brexiteers, won the largest share of the vote. Nigel Farage, a constant thorn in the side of the establishment, retained his seat.

With today’s public holidays in the UK, EU and U.S., the market will wait until tomorrow to provide its judgement on the votes but the threat of no deal must have increased with recent events which cannot be supportive for the currency.

The pound found some support on Friday versus the dollar although it was mostly trimming of short positions that pushed it higher. It reached 1.2733, closing at 1.2711.

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Further EU integration tough after Nationalist gains

The EU elections, which do have some meaning, appear to have dealt a blow to those like Emmanuel Macron who desire a more closely integrated EU.

Indeed, in France, the President’s Party was beaten into second place by the National Rally Party of Marine Le Pen. This result was mirrored across the region with the large centre-left and centre-right blocs suffering badly.

For the first time, Socialists and Conservatives will no longer have a majority. Nationalist Parties continue to dominate in Italy while in Germany, the major Centrist Parties lost significant ground. However, the right-wing AfD (Alternative for Germany) didn’t do as well as it expected despite improving on its 2014 result, although a lot has happened since then.

Greece saw the most radical action as its Prime Minister called a snap General election after his Party came a distant second in the vote.

For the longer term, the election could be bad for the EU economy since it is believed that it cannot remain as it is since the lack of fiscal unity is hobbling the ability of the ECB to add stimulus to drive growth in the same way as happened in the U.S. last year. However passing legislation for greater integration will now prove difficult.

On Friday, the single currency rallied versus a weakening dollar, reaching 1.1214 and closing at 1.1208.

Dollar awaiting fresh impetus as index corrects

Since the Fed has virtually told the market to make up its own mind over the strength or otherwise of the economy, it seems that traders spend two weeks disseminating one month’s data and the next two anticipating the following month.

They will have to wait an extra week for the employment report for May as the 1st of June falls on a Saturday.

The second cut of Q1 GDP will be released this week and will include tax receipts which tend, if anything, to improve the data.

On Friday, the Fed’s favoured measure of inflation will be released and traders will be hoping for some pickup in prices to encourage the Fed out of its recent self-inflicted tauper.

President Trump is on a visit to Japan and has been discussing the trade imbalance between the two countries. He has a little more leverage with Prime Minister Abe given the “special relationship” between the two.

It should have occurred to the President, or if not him to his advisors, that having exported a large part of its manufacturing capability it is impossible for the U.S. to maintain a higher share of global exports.

It has been a punishing schedule, starting with a round of golf with Abe followed by some Sumo.

With his visit to the UK to come, Trump is rallying America’s closest allies in an effort to be seen as a supportive President overseas as his 2020 campaign gets started.

The dollar index continued its recent correction on Friday, reaching 97.55, closing at 97.60.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”