The next major event for sterling exchange rates will be the European elections to be held next Thursday 23rd May. The outcome of these elections is likely to have a direct impact on the landscape of British politics. The local elections two weeks ago highlighted only too well that voters were prepared to move away from the traditional two parties. With voters likely to move towards the newly formed Brexit Party, Liberal Democrats as well as Change UK, it should make for a very interesting night and one that is difficult to predict.
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As things stand the consensus is that these parties will perform very well with Nigel Farage’s Brexit party expected to gain a majority of Members of European Parliament (MEP) seats. Wins by either party will claim the result as a reaffirmation of support for either a no deal Brexit or indeed a second referendum. A strong win for the Brexit Party carries risk for the pound and could result in a sharp drop in the price of sterling.
In the run up to these elections the pressure remains on Prime Minister Theresa May who is being pushed for plans on her departure from 10 Downing Street. The European elections could act as a trigger ahead of a Conservative grass roots meeting to be held 15th June where it has been reported that a vote of no confidence in the Prime Minister could be delivered at that time.
Cross-party talks between the Labour and Conservative Parties continue after five weeks of discussions, but with such a deadlock and suspicions between the parties it seems difficult to find agreement let alone a majority in the House of Commons.
It has been reported that a 4th and possibly final vote in Parliament will be taking place in the first week of June. If rejected the UK would then be set for no deal or for Article 50 to be revoked. It has been acknowledged that Nigel Farage would prop up the Conservative Government with his Brexit Party in the event of a hung Parliament following a general election. With no UK economic data releases today or for the rest of the week focus now moves to UK inflation data next week ahead of the European elections.
The British economy has received a boost after unemployment numbers arrived better than expected falling to just 3.8%. It takes unemployment to a new 44 year low, the lowest level since 1975. The pound has however come under pressure after the accompanying wage growth data did not perform as well as expected. Average earnings growth slowed to 3.2% down from 3.5% the previous quarter which will raise concerns at the Bank of England. Average earnings are watched closely by the Central Bank which has been hoping for an upturn in the numbers. There is also a view that the Labour market is already close to full employment which leaves little room for further improvement and may persuade the Bank of England to pause on any rate increases.
Bank of England Governor Mark Carney has indicated in recent months that a good outcome on Brexit could see interest rates rise sooner than expected. The tighter Labour market and an increase in wage growth has led the Bank of England to hint towards future interest rate hikes but this latest data could see rates remaining on hold until there is a sustainable increase in wage growth.
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