The U.S. Dollar is enjoying a rally this morning, especially against British Pound, following a dramatic night of election results in the United Kingdom. As we slept, the Conservative majority held in Parliament fell as Labour and other minority parties chipped away at parliamentary seats. The campaign was not a good one for Prime Minister Theresa May and the results not only reflect that, but also that unlike the Brexit referendum, the young vote made a big difference. Seems like the latest projections were indeed correct causing Sterling to plummet and stay down.
With no data out for the U.S., we expect the greenback to hold on to its overnight success as headlines today discuss the dovish nature of yesterday’s European Central Bank meeting, which sank the Euro, and the political ramifications of the British PM’s gamble with the snap election. While there may be some political distractions in Washington, monetary policy divergence will maintain the “buck” steady until the Fed meeting next Wednesday
The Euro depreciated to its lowest level in two weeks after the European Central Bank’s President Mario Draghi explained the downgrade to inflationary growth forecasts. The ECB head told the press that considering the tumble in oil and energy prices, it is more than prudent to lower the targets for the next two years.
Already under pressure because of growing at an inconsistent pace, inflation will stay a main point of focus for ECB officials, who also do not want to signal a determination to tighten monetary policy anytime soon. They are no longer on an interest-rate-cut path and balanced economic growth was noted, but markets now understand that the central bank is not interested in disturbing the accommodative environment fostered through multiple easing measures the past few years.
The Pound finally hit a major setback this year, dropping to its weakest level since mid-April based on the shocking election that took place yesterday. The Labour Party and Liberal Democrats achieved an excellent result that creates havoc for the conservative Tory party, who lost their majority and now will need to attempt building a coalition with other center-right groups in order to govern.
Prime Minister Theresa May immediately faced calls to resign her post, but quickly responded by scheduling a meeting with the queen to establish that she’d stay and foment a new alliance to give Conservatives the edge in parliament. Brexit seems to be a major driver of new votes against the ruling party, which could signify a new stance on Brexit that takes a softer tone with the EU.
We have believed all along that Sterling was vulnerable to fundamentals weakening as Brexit talks mean uncertainty for business and people alike, but now the new political reality convinces us that GBP is under threat and could further fall the second half of 2017.