Business

Politics have been driving force behind more currency fluctuations

French centrist presidential candidate Emmanuel Macron waves before addressing his supporters at his election day headquarters in Paris
French centrist presidential candidate Emmanuel Macron waves before addressing his supporters at his election day headquarters in Paris French centrist presidential candidate Emmanuel Macron waves before addressing his supporters at his election day headquarters in Paris

POLITICS has been the main driving force behind currency market moves in the past seven days. Sterling made gains in the early part of last week following Theresa May’s surprise announcement of a snap general election on June 8th.

The currency gained around 2 per cent versus the US dollar and it led to the euro falling to well below the 84p level. The election announcement - and expected strong majority outcome for Theresa May - has led some to speculate that it could enable her to follow through on her recent more conciliatory soundings regarding Brexit and the transition phase. It also pushes out the potential timing of the next election to 2022, allowing her more time to negotiate a transition deal.

However, the pound’s strong performance against the euro has been somewhat reversed as the French presidential election first round proved to be broadly in line with opinion polls. Centrist candidate Emmanuel Macron topped the poll (23.9 per cent), while far-right anti-EU candidate Marine Le Pen (21.4 per cent) will also be in the second round in two weeks (May 7). Polls are currently suggesting that Mr Macron will beat Ms Le Pen comfortably in the run-off.

Elsewhere, the US dollar was also influenced by politics as it struggled to some degree last week due to increasing uncertainty over the Trump administration’s ability and timeline to enact its fiscal stimulus plans.

Meanwhile, in terms of more ‘mundane’ economic matters, the European Central Bank (ECB) is due to meet this week. No changes to policy are anticipated. The statement from the March meeting was somewhat less dovish in tone, though it continued to emphasise an easing bias and that policy is likely to remain highly accommodative for a significant period of time.

While some market participants interpreted the upbeat tone of the last meeting as potentially pointing to an earlier tightening in monetary policy, the ECB has been active in recent weeks in reaffirming its dovish credentials. The ECB is likely to seek to re-emphasise this point this week.

Data-wise, we get a number of eurozone national level GDP releases this week for the first quarter of the year. France, the eurozone’s second largest economy, is anticipated to have recorded a quarterly rise of 0.4 per cent, matching its performance from the final three months of 2016. Figures for Spain and Belgium are also due.

Meanwhile, closer to home, GDP data for the first three months of the year are also the focus in the UK. The signs from the data in recent months are that the UK economy is slowing. Retail sales fell in the first quarter, while industrial output growth remains subdued. This in part reflects a negative impact from rising UK inflation, which in turn is weighing on spending. The UK economy is projected to have grown by 0.4 per cent in the first quarter - down from 0.7 per cent in the final three months of last year.