Election Time is Hot Air Time!

The UK holds local elections next week Thursday and the Conservative party are expected to take a strong kicking.

Sterling came in for a bit of a beating on Friday following an awful GDP report. We were bearish before this announcement but this number caused a sharp intake of breath. 0.1% is the lowest quarter on quarter growth since Q4 2012 with particular weakness seen in construction and services sectors – together accounting for over 80% of the UK economy.

There are some caveats within this number of course; it is only the advance reading and therefore subject to revision and the poor weather that the UK suffered will have had a large effect on demand, particularly private consumption. That said, March’s numbers were horrific and are unlikely to be part of the sample yet so any revision to this advance number could easily be lower as opposed to higher. ​

At the beginning of last week the expected probability of a base rate hike at May’s Bank of England meeting was around 86%; it now sits at 24% and sterling is sliding as investors price in a delay to increases in the base rate until December.

The resignation of Home Secretary Amber Rudd is not a market event however feeds into market concerns on the Brexit balance within the Cabinet and votes on the Customs Union within the House of Commons. ‘The Brexit War Committee’ – the Cabinet plus some other members of the government – meet this Wednesday and with Rudd’s replacement expected to be in place by then, his or her stance on Brexit will be crucial.

Dollar strength that has become the hallmark of recent market moves continued overnight last night as Asia picked up the optimism stemming from the US GDP report. While the overall report was just about as expected and featured only a 1.1% expansion of consumer spending, investors positioned themselves as optimists for upcoming data releases and subsequent revisions to this advance number.

Two of President Trump’s foremost trade representatives are on their way to China this week to attempt to gain an outline of an ongoing trade deal between the two countries. Robert Lighthizer, the US Trade Representative and Larry Kudlow, Trump’s top economic adviser, have different views of what a deal would look like and while a deal is not expected any time soon, measures will be looked at through the prism of any near-term help they could afford the Trump campaign and Republicans in this year’s mid-term elections this November.

US Personal Consumption Expenditure inflation is due this afternoon and represents the Fed’s preferred measure of what prices are doing in the US economy. A core price close to 2% should be enough to keep the dollar on the front foot.

See you next week!

To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.

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