Weekly Currency Brief – 23rd May – 30th May 2017

Felled by the polls
According to YouGov, an opinion pollster, over the course of two weeks the Conservative party’s advantage over Labour has narrowed from 20 points to 5. With another ten days to go before the general election the trend has raised concern among investors that the government might not win the commanding majority it claims to need in order to make a success of the Brexit negotiations.

Another cause for worry was Thursday’s revised data for UK gross domestic product in the first quarter of the year. The initial estimate of 0.3% growth was marked down to 0.2%, principally because of weak consumer spending. With prices now rising more quickly than wages the fear is that reduced spending power will be a drag on the economy.

The pound was the weakest among the major currencies. It lost an average of -1.3% on the week and was down by an average of -2.1% from its position a month earlier, sharing the wooden spoon with the Australian dollar.

Beyond the horizon
With Donald Trump away for the week in the Middle East and Europe the political profile of the US administration was a little lower than usual. The only notable White House development was the naming of the president’s son-in-law and advisor in the context of Russian links.

The US economic data were similarly unremarkable. First quarter growth was revised up from 0.2% to 0.3% (an annualised 1.2%). The minutes of the Federal Reserve’s policy meeting in early May suggested a committee that was perhaps less gung-ho than investors had imagined about raising interest rates. Even so, subsequent comments by Fed bosses continued to support the possibility of two more increases this year. They helped to keep the dollar in the front half of the field. It strengthened by a cent and a quarter against the euro and by one and three quarter cents against sterling.

Extraordinary support
The German chancellor’s observation a week earlier that the euro was “too weak” did not distract European Central Bank president Mario Draghi when he addressed the European parliament on Monday. Sig. Draghi told MEPs he was “firmly convinced that an extraordinary amount of monetary support is still necessary”. In other words, the Governing Council is not about to start making plans for a run-down of the ECB’s €60bn-a-month asset purchase programme, let alone thinking about raising interest rates.

The ECB president’s words did not have a dramatic impact on the euro, perhaps partly because he spoke them on a day when investors in London and New York were enjoying a bank holiday. They did, however, contribute to a less than stellar week for the euro. It took just a quarter of a cent off the scuppered British pound and lost one and a quarter US cents.