Morning Report: 31 May 2017

31st May 2017 By: Ranko Berich

GBP Sterling traded lower overnight after the latest YouGov general election poll suggested that the Conservative Party may fall short of a majority in the upcoming elections. Despite this, stories about intraday moves in sterling due to polls and political stories should be taken with a large grain of salt. Although sterling did indeed strengthen when the General Election was announced, and weaken overnight, the overall effect of various possible election outcomes is not by any means clear. Sterling was already strengthening before the General election was announced, and indeed the latest downturn in the pound could also be equally driven by deteriorating fundamental data. In the run up to the Brexit referendum, sterling traded with a clear negative correlation to the chances of a vote to leave. No such link can be seen in betting odds of a Conservative majority, and it is entirely plausible, as argued by JP Morgan analysts recently, that a hung parliament could ultimately be a sterling friendly outcome due to increasing the odds of a “soft” Brexit. For now, it certainly does seem like additional election uncertainty is acting as a risk for sterling, but extreme caution should be taken in trying to auger a sterling outcome from the various possible election results.

EUR After a dip earlier in the day on dovish comments from the European Central Bank’s Mario Draghi, the euro quickly regained momentum off the back of reports that the ECB will upgrade its assessment of economic risk at next month’s meeting. Such an upgrade would make sense: economic conditions are indeed improving in the eurozone, but the question remains how committed the ECB is to its current easing programme. Yesterday’s data included a weak print for the German Consumer Price Index, which shrunk 0.2% in May. German Retail Sales data this morning showed sales falling by the same amount, while French CPI rose 0.1%, less than expected. Eurozone CPI data will be released at 10:00 BST, and will be closely watched to see if last month’s sharp increase unwinds. Unemployment will also be released at 10:00.

USD USD weakened to the euro yesterday but remains on the offensive against sterling. Yesterday’s data contained few surprises, with the Core Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, rose 0.2% after contracting in March. Personal Spending and Income also rose as expected, while house price growth, as measures by the Case Shiller Index, accelerated to a three year high. Despite the mild improvement in inflation, yesterday’s figures may not be enough to dispel concerns about a slowdown in price growth. Influential Federal Reserve Governor Lael Brainard said as much in New York, arguing that although another rate hike would probably be needed soon, if weak inflation persists the Fed’s hiking path may need to be reconsidered. Today at 13:00 BST Brainard’s Fed colleague Kaplan will speak, and at 14:45 the Chicago Purchasing Managers Index will be released.

UK news

  • Independent: Tories to fall short of outright majority and face hung parliament, new poll analysis predicts. Britain could be on course for a hung parliament in nine days’ time, according to a new projection that suggests the Conservatives could fall 16 seats short of an overall majority. The seat-by-seat prediction by YouGov for The Times suggests that the Conservatives are on course to win 310 seats at the election – short of an absolute majority of 326 seats needed to form a Government.
  • Telegraph: BA boss given vote of confidence by Willie Walsh as full details of IT meltdown revealed. Willie Walsh has given his public backing to British Airways chief Alex Cruz as key details into the investigation of what went wrong with the airline’s computer servers over the bank holiday weekend can be revealed for the first time.
  • Guardian: Police believe Manchester bomber Salman Abedi largely acted alone. Police now believe the Manchester bomber acted largely alone in the run-up to his suicide attack at Ariana Grande’s concert. Soon after Salman Abedi blew himself up at Manchester Arena eight days ago police said they were investigating a potential terror “network”. But now detectives say the 22-year-old shopped alone for most of the components he used to make the bomb, which killed himself and 22 concertgoers on 22 May and injured 116 more.