Economic Update
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Focus shifts to UK Election on Thursday
11 minute read01 July 2024
GBP
As summer sport well and truly takes hold, we seem to have experienced a swing in market focus (short term perhaps) to politics, which now dominate the currency headlines, particularly for those based in the UK. The UK general election, which takes place on Thursday, is now very much dominating the mainstream press, too, as we see all efforts rallied by all parties to garner some last-minute support.
Rishi Sunak appears to be leaning on England’s last-minute recovery and win against Slovakia in the Euros 2024 as a sign that it’s ‘not over until it’s over’. However, many would debate whether the current PM has a united team around him, which would allow for such a spectacular shot on target for the Conservatives.
The pound held firm at the end of last week, seemingly stuck versus the euro and US dollar at some key pivot levels. Data releases from the UK were limited, with data from the CBI being a mixed bag throughout the week as the industrial trends survey showed expansion in the sector , in contrast the distributive sales survey also from the CBI suggested a decline in retail sales for June, awakening fears of a UK economic slowdown being in the balance.
On Friday, UK GDP growth data for Q1 was revised higher from 0.6% to 0.7%, which is the fastest pace of growth since Q4 2021 in the UK. However, market caution ahead of the weekend's elections in France meant very little price movement in FX markets on the back of the release.
This week, we have manufacturing and service data releases for the UK on Wednesday, which have the potential to be overlooked given the main event of Thursday’s general election. These data points will provide a snapshot of UK economic health, which the Bank of England will need to take note of when looking at interest rate policy ahead of their next meeting in August.
Speculation of a move to cut interest rates during August’s meeting continues to escalate for the UK, and with the cut to the energy sector price cap, which comes into force today, set to save the average household around £120 per year, potentially continuing to nudge inflation a little lower in the short term.
EUR
Yesterday’s first round of voting in France delivered the expected victory for Marine Le Pen’s far-right National Rally party, taking 33.2% of the votes and pushing President Emmanuel Macron’s Ensemble Alliance down into third place also behind the Nouveau Front Populaire party.
If this trend continues through to the final round of voting on Sunday 7th July France could find themselves led by a far-right political party for the first time since World War II which is causing a ripple of concern across the bloc. The situation in France is perhaps exacerbated by the recent successes in Germany of the far-right Alternative for Germany (AfD) party ahead of next month’s European Parliament election.
As these far-right forces continue to gain strength, the single currency struggles to hold its ground, and developments will filter through to the markets. Typically, the euro is sold off over concerns that a move could derail economic growth across the EU and increase tensions throughout the European parliament, especially with the key economies of Germany and France.
Euro strength would suggest that the expectation was for Maine Le Pen to win a larger majority of the vote in the first round. The political landscape, which is developing, does pose a short-mid-term threat to the value of the single currency and should be monitored closely. We could experience some increased volatility depending on the outcome ahead.
The bigger and longer-term market focus continues to rest on monetary policy. Having made the first move to cut interest rates, the focus is currently resting on the ECB and its next move. Divergence from the Federal Reserve in the US, which is looking less likely to cut rates until Q4 or even at all in 2024, is a further risk factor to the euro’s strength.
There is a slew of speeches in the diary this week from several members of the ECB Governing Council, including President Lagarde, which could add more uncertainty to the mix for the single currency. Governing Council Member Robert Holzmann highlighted in June that further reductions in interest rates from the ECB, ahead of the Fed cutting rates, will risk a more substantial impact on the Euro exchange rate and inflation rates across the bloc. Current market expectations would suggest that we could see up to three cuts in interest rates ahead of the Fed’s first move. Politics are also beginning to dominate the US press as the pageantry increases in intensity and time ticks down to the US election in November. Biden and Trump’s first presidential election debate was widely panned by the global media and was declared a win for Trump, although mostly from his camp. However, the outcome has left some voters feeling uninspired about how they should vote. However, with polls currently suggesting that Trump is slightly ahead in popularity and could take his second term as US President, the USD has the potential to strengthen on the back of such sentiment as he is seen as pro-business and positive for the growth of the US economy and an increase in inflationary pressure. However, moves this morning have seen the USD weaken slightly compared to last weekend due to pushback from the euro and the result of initial voting in France, which fell slightly short of the expected whitewash by Marine Le Pen. Expectations for the Fed's first rate cut of 2024 are unlikely until at least September, when there is a 64% chance of a cut. Markets may still consider this unlikely, however, given its proximity to the election on November 5th and that some Fed policymakers don’t think the central bank should cut at all this year. This week, we’ll also see the latest non-farm payroll data released, with forecasts expecting an increase of 189K in the number of people employed during the previous month, excluding those in the farming industry. Reports suggest that both employment and wage growth in the US are moderating, which could be welcome news for Jerome Powell and the Fed. This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory. Looking at the poll data, consuming the blow-by-blow analysis, and listening to an unhealthy number of politics podcasts, my expectation for the UK general election is that there is a very high probability that none of us will be surprised, and Labour will win a healthy majority. However, as we know from Brexit and Trump, we can never be sure, so I believe there are three credible scenarios we could find ourselves in this time next week: To summarise, there is a very high chance (90%) that nothing significant will change for the GBP and a very slim chance (10%) that the GBP will move lower, with a 3% chance of a substantial crash. I do not see a scenario where the GBP gains significantly due to this event in particular, but that is not to say it won’t gain strength later due to policy announcements from the new government or other unrelated events. As always, this is my personal view and does not constitute financial advice. You will and should find conflicting views across various platforms and outlets, which will help you make the most informed decision for your unique situation. Probability data sourced from oddschecker.com USD
Potential Election Outcomes - Joe Calnan
This commentary does not constitute financial advice. All rates are sourced from Bloomberg and forecasts are taken from Forex Factory.
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