Rational FX
Sterling surges 2% against the Dollar
Tuesday 02nd May 2017 17:43 EDT
Sterling surged over 2% percent against the Dollar and hit it's highest levels since mid-December on 18th April, after British Prime Minister Theresa May surprised markets by calling an early parliamentary election for the 8th June.
Running contrary to the norm on shock election announcements, the Pound's steep gains point to hope among investors that the June poll may stabilise domestic UK politics as the country faces its biggest challenges in half a century.
The Pound strengthened as polls indicated that British Prime Minister Theresa May is on course to win in a landslide victory in the June 8 election. This confirms the view that she will get a stronger mandate for two years of Brexit talks. A stronger mandate for May in parliament could likely give her the authority she needs over her own party in order to negotiate Brexit.
The UK's GDP increased by 0.7 per cent in the fourth quarter of 2016, driven by continued strong consumer spending and consumer focused industries as well as strong exports. Consumer spending rose as consumers benefitted from high employment while exports of goods and services were lifted by the weakened pound.
UK manufacturing lost some momentum in March, as export orders grew more slowly and demand for consumer goods weakened against a backdrop of rising inflation pressures.
Data showed UK inflation remained steady in March, putting no further pressure on the Bank of England to move towards raising interest rates. Consumer prices increased by 2.3 percent annually last month, according to the Office for National Statistics. Inflation is now above the BoE's 2 percent target but it has indicated that it is in no hurry to raise rates, despite the fact that it expects consumer price growth will rise to as high as 2.8 percent in around a year's time before falling back.
British retail sales posted their biggest quarterly fall in seven years in the first three months of 2017, as rising prices since last year's Brexit vote put more pressure on consumers.
The Euro strengthened after Emmanuel Macron took a significant step towards the French presidency by winning the first round of voting and qualifying for a May 7 runoff against National Front leader Marine Le Pen. Mr Macron won 23.8% of votes in the first round, while Ms Le Pen took 21.5%. Several political rivals are now expected to unite behind Mr Macron in the run-off vote, in a bid to keep Ms Le Pen's Front National (FN) from power.
France's outgoing president, Francois Hollande urged people to back Emmanuel Macron in a vote to choose his successor next month and reject far-right leader Marine Le Pen, whose place in the runoff represented a "risk" for France.
Hollande, threw his weight behind macron, saying Le Pen's policies were divisive and stigmatised sections of the population. Opinion polls indicate that he will take at least 61 percent of the vote against Le Pen after two defeated rivals pledged to back him to stop her eurosceptic, anti-immigrant platform.
Analysts widely expect Centrist Macron to win the battle against far-right anti-EU candidate Marine Le Pen in the second round of France's presidential election. After a race full of surprises, investors had feared Le Pen and euroskeptic Jean Luc Melenchon would qualify for the final round in May, stoking fears of a so-called Frexit and the beginning of the end of the eurozone.
In early April, Federal Reserve chair Janet Yellen said she plans to raise U.S. interest rates gradually so they sustain full employment and near-2-percent inflation without letting the economy overheat. The Fed raised rates in March for only the third time since the Great Recession, and most Fed officials expect the central bank to raise rates at least two more times this year.
President Trump commented that the US dollar 'is getting too strong' and he would prefer the Federal Reserve to keep interest rates low. Mr. Trump also confirmed that his administration won't label China a currency manipulator, as he is hoping to get them on board in his approach against North Korea.
Trump's economic team unveiled a plan that included a cut to the corporate tax rate from 35 per cent to 15 per cent and an incentive for multinational groups to repatriate trillions of dollars held overseas. This was viewed by markets as disappointing and unlikely to go forward in Congress, causing the dollar to retreat.