Good morning,

Pound holding up and holding on

The dust has settled from the announcement of the General Election in the UK and the pound has managed to hold onto its recent gains. We think that markets are still getting used to a new dynamic of the pound having the ability to trade higher or lower for a sustained period of time; through Q4 and most of Q1 any gains for the pound have been quickly stamped down.

Over the longer term we believe that the pound is a tad overbought on the news of the election and some of the steam will fall out of the price as the campaigns drone on. Overnight a poll by The Times & YouGov has put the Conservative Party on 48%, Labour on 24%, the Lib Dems on 12%, UKIP on 7% and other parties on 9%.

That is a 4% bump higher for Theresa May in the past week with UKIP down 3%. Her hard lines on Brexit are winning her fans from UKIP voters now but will potential giveaways on immigration or contributions to the EU limit their support come polling day? Labour are also up 1% on the week.

There are 49 days to go; plenty of time for all these questions to be answered.

Centrist consensus keeping EUR strong

The French election is also coming to an exciting crescendo although moves in polls have been rather limited. The daily indications of voting intentions continue to show that it is all to play for with markets remaining quietly confident that the consensus expectation of Sunday’s vote leading to a 2nd round run-off between centrist Emmanuel Macron and Front National leader Marine Le Pen. Any other result in Sunday’s vote will likely see the euro stumble with a run off of Le Pen and Melanchon the most negative combination.

Polling released this morning suggests that Macron would beat Le Pen 66% to 34% in the 2nd round so a euro rally into the May 7th round of voting could easily materialise.

Immigration and inflation

Overnight news from the States has suggested that the Fed is rather happy with the middling track that the US economy is walking at the moment, noting that the expansion in the States is “modest and moderate”. On inflation, we note that the Federal Reserve seems concerned over some tightness in the housing market. While some inflation measures focus on the cost of food, fuel and other household goods housing remains the number 1 expenditure in most western households. A labour market unable to build houses cheaply due to a lack of workforce from an immigration crackdown and walling off of its most fruitful recruiting ground could easily emerge.

This is hardly the inflation the US authorities are looking for.

The Day Ahead

The data calendar is once again quiet today although German inflation and US initial jobless claims will set up the euro and the dollar for conversations over wages in their respective economies. Forecasting calm is a fool’s errand in these markets but, for now, conditions are set fair for the day’s trade although we would not be surprised by some pre-voting weakness in the euro slipping into prices by the end of the session.

Have a great day

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