Sovereign International Daily Market Report
Labour set for big win at UK General Election
Attention in financial markets has very much shifted towards politics this week.
Highlights:
Fourteen years of Conservative government are set to draw to a close in the UK this week, with Keir Starmer’s Labour Party on course for a massive majority victory in Thursday’s General Election. Labour remains well ahead in the polls (40% vs. just 20% for the Tories), while Electoral Calculus suggests that they could win as many as 470 seats in the House of Commons, which would be the largest single-party majority since 1931.
GBP remains well bid on the dollar, despite the likelihood of a deviation from the political status quo. The prospect of closer UK-EU ties under the new government, in particular, has been greeted positively by market participants, which see Labour as the best-case scenario for both the pound and the UK economy.
The euro, meanwhile, has found gains hard to come by this week, with investors still jittery ahead of Sunday’s second round vote in France. A hung parliament appears likely, though the prospect of a majority for the right-wing is keeping market participants on edge. Aside from political news, Friday’s US payrolls report will be all-important for FX this week.
USD
News on Tuesday had mixed implications for the US dollar. The May JOLTS report surprised to the upside, with job openings unexpectedly increasing to 8.14 million from 7.92M, while quits rose to 3.46M. FOMC Chair Powell, however, struck a dovish note during remarks made in Portugal. Powell said that the US had made ‘significant progress’ on inflation and that the world’s largest economy was back on a ‘disinflationary path’. He failed to provide clues on the timing of cuts, though we think his remarks are in line with our call for a first-rate reduction in September - markets are largely in agreement.
The latest business activity data from ISM and S&P will be out this afternoon. Investors will, however, have one eye on Friday’s nonfarm payrolls data. Economists are eyeing a modest easing in job creation and wage growth.
EUR
Tuesday’s Euro Area inflation report failed to rock the boat. The main measure fell, although core price pressures were somewhat more persistent than thought. Both core and services inflation, which are closely watched by ECB officials, were unchanged and remain elevated at 2.9% and 4.1% respectively. The data will likely have little impact on ECB decision making, particularly given the only modest surprise, with investors continuing to price in a 70% probability of a Euro Area rate cut in September and a total of 40bps of cuts by year-end. There will be two more inflation releases before the crucial September meeting, and clearly a lot can change between now and then.
Revised PMI data out today will unlikely move the euro, with markets to instead focus on the latest ECB meeting minutes (Thursday) and May retail sales (Friday). So far, markets are taking the uncertainty surrounding Sunday’s French runoff vote in stride, although we could see some wild swings in Asian trading on Monday should a right-wing majority become an increasingly realistic possibility.
GBP ?
Unlike previous elections, this Thursday’s vote may be somewhat of a low-key event for GBP. A Labour supermajority is fully priced in, and indeed would not deviate too much from the status quo, with only modest tax and spending hikes set out in the manifesto (0.35% and 0.2% of GDP respectively). Sterling could trade in narrow ranges once the exit poll is released (10pm) and results of each constituency trickle through during the early hours. A scenario whereby the Labour majority is smaller than anticipated could be bearish for the UK currency, though this seems unlikely. ?
There will be no tier-1 economic data out this week, so political news will be front and centre in investors’ minds until next Thursday’s GDP data for May and the June inflation report on 17/07.
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