The pound enters May in a mixed pattern with Brexit uncertainties persisting, and the lack of any significant news to push it majorly in either direction. The Brexit extension agreed until October 31st has provided relief that no-deal is no longer imminent and removed the shackles that element was attaching to the pound. The local, and possibly European elections in May will provide some important food for thought, with sterling seemingly expected to remain under pressure from the uncertainty these events represent.
The UK Governments position, led by Theresa May for now, is to see the EU Withdrawal Bill passed. If agreed in the UK Parliament, this would allow the UK to leave the EU, Mrs Mays plan is to have left by May 22nd which is still possible ahead of the 23rd May European elections. Sterling is likely rise if the deal is agreed, since it removes the uncertainty and guarantees that the UK will not be leaving with no-deal. At present there could appear to be more reasons to be pessimistic than optimistic over the immediate future for the pound.
Focus will remain on Theresa May and the prospect of her EU Withdrawal Bill being passed. Recent talks with between the Conservatives and Labour to garner support do not appear to be making much progress, and the market is now gearing up to the UKs local elections on May 2nd, likely to provide an indication of public sentiments on Brexit. The May 23rd European elections will also be a test for the Government, plus an opportunity for the public to voice disdain for the current state of Brexit negotiations. Whilst the European elections will not take place if the EU Withdrawal Bill has been passed, headlines surrounding the Brexit Partys prominence will do little to help the pound. There are suggestions that a particularly bad result for PM May might force her to consider standing aside, throwing even more uncertainty into the mix.
May seems like a challenging month for the pound, with two potential elections which seem unlikely to benefit the Government. Attention will remain on the likelihood of Theresa May passing her deal, and the general mood seems unlikely to be positive for the pound. Thursday May 2nd is a crucial date with not only the UK local elections, but also the release of the latest Bank of England (BoE) decision and Quarterly Inflation Report (QIR). This could be a volatile time in the currency markets. Mark Carney has been vocal in his criticism of Brexit, and any comments could sway the pound. The QIR will also reveal the Banks latest projections on growth and inflation, which again may influence sterling rates.
The UK economy is not performing too badly, with growth predicted to come in at 0.2%. The first estimate for Q1 of this year is released on the 10th May. Much of the recent boost in output has been put down to ‘stockpiling ahead of the previous 29th March EU exit date. The 9th May is the same figure but from the National Institute of Economic and Social Research (NIESR), another body monitoring growth. I believe these releases on the 9th and 10th May could be market movers as the first hard economic performance data in 2019 for the UK.
Despite the gloomy predictions, the UK economy is holding up in the face of challenges. The Brexit vote and current situation has taken away some of the confidence previously held over the direction of the UK economy, but it has provided some urgency and impetus for business to be economically active. I feel that the balance is probably in favour of the more negative effects so far, but with the worst fears not having been realised, sterling is maintaining a degree of form and against AUD, NZD and South African Rand is not too far from post-Brexit highs.
Sterling looks like it will continue to struggle from Brexit uncertainties, perhaps likely to be highlighted by the local elections and any attempts by Theresa May to pass her Withdrawal Bill. Sterling seems unlikely to lose significant value with the lack of no-deal providing some comfort, and the UKs economic performance also helping to provide a loose floor too, which is helping the pound. It is possible the European election will take place and the current malaise may continue into June with sterling having drifted slightly lower as Mrs Mays position becomes more unsettled but she remains committed to her deal and staying in power.
On the upside for the pound would be the passing of the deal, on the downside the prospect of a resignation or a motion of no confidence in the Government being passed. There is no Parliamentary majority for this so far, so it seems unlikely at present.
Sterling seems to have aligned itself in a mid-range position against many currencies following a very strong start to the year, but the optimism has been gently fading. Sterling could be volatile around the elections but with it offering nothing concrete in terms of policy change to the Brexit process, sterling may not become majorly interested in the outcomes, they could be more symbolic than representing any specific change in policy.
May features a series of important economic and political events which could well change the picture for sterling exchange rates. Speak to your account manager to be kept up to date with the latest news and market commentary as we continue to await more specific news over what Brexit means.
The euro has been weaker in 2019 but has regained some composure, with the prospect of Trade Wars with the US appearing not to be as bad as previously expected. Ultimately, the euro is weaker this year because of concerns over a slowing economy and also heightened political risk. Concerns that the Trade Wars escalating would have seen the European Central Bank (ECB) scale back on their monetary policy plans, have put pressure on the euro, and the month of May could well offer some more reasons to be concerned over the economic direction for the single currency bloc.
On the political side, concerns relating to the European elections which are scheduled for the 23rd May could unsettle the euro, as the concern over a more ‘populist spread of Members of European Parliament (MEPs) could unnerve euro investors. The euro is currently in a state of flux following some big changes in the economic and political outlook in 2019, May could therefore see a rather unsettled month as the market receive the latest news on these defining factors.
Economic news has been important since the European Central Bank confirmed it was scaling back on its monetary policy assistance back in December 2018. With the Eurozone still a few years out of a ‘crisis period which saw the currency lose value as investors feared a Greek exit, the direction of the ECB is vital to the confidence which has underpinned the more recent strength of the euro, compared to the weakness it displayed in 2013-2015 at the height of the debt crisis.
The more recent positive direction has been called into question in 2019, with Mario Draghi, President of the ECB stating the risks in the Eurozone remain ‘tilted to the downside. Part of the negative assessment related to increasing threats of the Trade Wars weighing on global growth, which will only weigh on the Eurozone economy. With fresh news that perhaps there could be a deal struck on these trade concerns, the euro has risen slightly in value but does remain at risk of these concerns escalating once again.
There is no ECB meeting in May, but the latest meeting minutes are due Wednesday May 8th and will provide further insight into policy makers views and outlook for the bloc. Other important economic releases will be Consumer Price Inflation (CPI) Inflation data on Friday 3rd May and Wednesday May 15th Gross Domestic Product (GDP) at 10:00. That same day is also German GDP at 07:00, and then Friday May 17th sees another measure of Inflation data once again, before finally German Inflation on the Friday 31st May. All in all, these releases will provide the latest updates on how the Eurozone economy is performing and whether investors should be concerned over its outlook.
The European elections may be a very testing time for the euro with increasing concerns that more populist and extreme parties will receive greater shares of the vote. A key concern would the ‘far-right pact, where Italian, German, Dutch and the more right leaning parties of other countries, are seeking to join forces and push their policies which do not sit so well with the more ‘integrated approach embodied by French President Macron and German Chancellor Merkel. All in all, the European elections look set to be an uncertain time for the euro and clients with any exposure might wish to consider a review of their position ahead of the event. In recent years, the rise of anti-EU parties has unsettled the single currency and this election looks set to be another opportunity for such concerns to become apparent in the currency markets eyes.
The Brexit extension agreed until October 31st has granted sterling some grace, in postponing the cliff-edge and possible damage to sterling of a no-deal Brexit. Clients with a position to buy or sell the pound against the euro will find plenty to discuss in May with some potentially key developments on Brexit and in the UKs local and European elections. The pound may lose ground as investors remain wary over the political outlook, with Theresa May losing support and appearing weaker and weaker. The possibility of the UK Prime Minister losing office could see the pound on the back foot, it is difficult to see where a breakthrough will come through from the current malaise.
It is possible that the main event which would help the pound to rise is the prospect of the EU Withdrawal bill being passed by the UK Parliament. There is however currently no majority in Parliament to support this, and none of the various sides seem overly willing to compromise. Whilst the euro does looks like it too may remain on the weaker side, the pound could be more in the firing line, and this could result in sterling losing some ground against the single currency in May.
The US dollar has been stronger entering May as previous concerns over a recession begin to fade, and the market becomes more supportive of the monetary policy approach from the US Central Bank, the Federal Reserve (Fed). Whilst the US economy does not appear to be growing as fast as last year, there is a renewed confidence the ‘looser economic policy from the Fed will ultimately be of longer-term help to the US economy, and therefore the US dollar.
A key factor to monitor in May will be the recent updates about latest Trade Wars, which so far have appeared to reflect a growing belief that ultimately, we will see progress made. Trade talks are expected to begin in early May, but we might struggle to get any quick answers. With US interest rates at 2.25% – 2.5%, much farther ahead of the UK (0.75%) and Eurozone (0%), the US currency remains an attractive currency to hold and this position looks like it could remain in May.
Wednesday May 1st sees the US Interest rate decision , where the latest commentary from the Fed will be closely watched. US Fed Chairman Jerome Powell indicated at the last meeting that the next interest rate move could be an increase or decrease, and this potential for the Fed to keep policy loose has lately provided the market with confidence over the outlook for the US economy. The worst fears that Trade Wars would trigger a US recession have failed to manifest so far, the US dollar has been benefitting from a belief it will continue to be one of the highest yielding currencies.
The first week of May is also important with Friday May 3rd providing the latest Unemployment and Non-Farm Payroll (NFPR) data releases, highlighting the change in the US labour market. The economic picture for the United States has been mixed with the improved lower unemployment numbers of 3.8% being welcomed, but the slowing rate of growth is a concern for the longer-term prospects of the US economy.
On Friday May 10th we will then see US Inflation data, Wednesday 15th US Retail Sales and then Thursday May 30th US Gross Domestic Product (GDP) data. We will also learn on Wednesday May 22nd the latest minutes from the interest rate decision on the 1st, which may also be a market mover.
The US dollar could remain in a mixed pattern, with no clear direction being established as the market awaits some key news on the Trade Wars. High level trade talks are scheduled to begin in early May but Trump himself has stated it might take until June to resolve any issues and find agreement. In the absence of any fresh new news to increase or decrease market confidence, the US dollar appears like it might benefit from the ‘dovish or soft approach by the US Central Bank.
Pound to US dollar rates could have a very busy start to May with the US interest rate decision on the 1st, then the UKs the following day. The 2nd of May if also important for sterling as there are local elections in the UK where the Conservative Party are expected to suffer heavy losses. If this is the case, it could impact the pound, and assuming the US dollar is still benefitting from the more positive sentiments keeping it afloat at the end of April, we could see GBPUSD levels remaining in the higher 1.20s.
The month of May is also an important month with the latest European elections which could influence global attitudes on risk and influence the euro against the US dollar, which can also affect GBPUSD performance. Overall, continued Brexit uncertainties and concerns over political unity in the Conservative Party, could be expected to keep sterling weaker in May. Should PM Mays deal get passed the pound might well benefit but this is proving to be a rather difficult bridge to cross so far and hence the dollar might be the stronger of the pair in May.
The Australian dollar has had mixed fortunes in 2019 with many key domestic and global issues leading to a lack of clarity on the strength of currency. There is a growing expectation that the Reserve Bank of Australia (RBA) will need to review its current monetary policy plans following Aprils 16-year low for inflation figures. This has triggered increased expectations that the RBA will need to cut its base interest rates. The Aussie was sold off towards the end of April, and May might be a particularly testing time as the RBA is forced to acknowledge this change.
Global issues such as the US-China Trade wars are also a key concern, and expectations ahead of further trade talks will likely be a factor for the Australian currency in May. The behavior on the Australian dollar is partly linked to the outcomes of these global events, as investor confidence increases and decreases about the future performance of the economy. May could be a pivotal month for the Aussie dollar with both Australian politics, trade talks and RBA policy at important crossroads.
The Reserve Bank of Australia (RBA) has kept interest rates on hold at 1.5% since October 2017, awaiting significant news to force them to change. So far, they have been in a neutral holding pattern, waiting to see if further cuts (or even hikes) are warranted. Aprils very low inflation figure of 1.4% caused markets to begin to factor in a rate cut with some analysts thinking this could be as soon as Mays meeting. Tuesday May 7th is the latest RBA Interest Rate decision and Rate statement, and could be a market mover, it is one for the diary for any clients concerned with the Australian dollar.
Other important news to monitor will be Thursday May 9th Chinese Inflation data, Friday May 10th RBA Policy Statement and May 16th Unemployment data. All of these factors are likely to contribute to the RBAs next interest rate decision. With the US-Chinese trade wars ongoing, the Chinese data will also carry some weight too, as investors digest the extent to which the trade wars are negatively influencing the Chinese, and therefore the Australian, economy.
Another key point in May is Saturday 18th May, with the Australian election due. Currently, Labour are performing well in the polls and this could see the Australian dollar weaker since there is an expectation that the economic policies of Labour will not be as ‘business friendly as the Liberals. Elections are typically uncertain events, as the market weighs up the varying prospects of each potential outcome.
May could start with volatility for GBPAUD rates, with UK local elections and the UK interest rate decision on the 2nd May, before what I believe could be a very important Australian interest rate decision on the 7th. If we see AUD weakness around the RBA decision, GBPAUD interbank levels could quite easily fall back into the lower 1.80s. Sterling seems unlikely to be performing too well since there are many unanswered questions on Brexit and the stability of the UK Government. If the EU Withdrawal Bill is passed by the UK parliament, sterling could find some form, but it is difficult to see this occurring at present.
The month of May also contains the possibility for the US-China trade wars to become a hot topic of conversation again, with a strong link to the performance on the Australian dollar. Despite some likely tough periods for sterling, I think there could be some reasons for optimism over a weaker Australian dollar, as a potent negative political and economic mix, causes investors to backtrack from the currency.
If you are considering a currency transfer, buying a property abroad or looking to bring funds back to the UK from overseas, 2019 has a number of potential events which could create some excellent opportunities for well-prepared buyers and sellers.
In any event, our currency experts are on standby to answer any of your questions, so feel free to call our trading floor on 01494 725 353 if you would like to discuss a transfer.
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