Good morning,

EUR: No trouble in Spain

Spanish elections over the weekend have failed to upset the euro with the already ruling PSOE party increasing their vote share and likely to begin a coalition with the far left Podemos party and other more regional factions. While this was not analysts’ central expectation, it is by no means a negative one for the euro or the Spanish economy as a whole.

Moving forward, any new government is going to have to tackle still very high levels of youth unemployment, slowing growth, high levels of debt and the continued pressure of Catalan separatism. Spain is not a country that we predict will be front and centre of any upset to the wider Eurozone; there are greater pressures from Italy, Germany, France and Brexit that are higher up the list of concerns.

The euro has remained quiet over the weekend but will be watching tomorrow’s GDP releases carefully for signs – such as we have seen in the US 0 that the bottom has been and gone.

USD: Still in the driving seat

Friday’s GDP report was a lot better than we or most of the wider market had expected and helped solidify the USD strength that has been a hallmark of currency markets in the past few months.

It’s still our belief that the USD can and probably will move higher from here given its characteristics as a high-yield currency and a haven in equal measure, although markets were positioned heavily in favour of the greenback in the lead-in to Friday’s GDP report. We, therefore, could see a slight softening in the coming days as investors bank profits ahead of the Fed meeting (Wednesday) and Friday’s jobs report.

Today and the rest of this week is likely to be quite strange with most Asian countries enjoying at least a few bank holidays for the ‘Golden Week’ celebrations. A lack of liquidity can mean volatile conditions and it can mean abject boredom. Currency markets have trended towards the latter in the past few weeks but a big shift in global expectations given the lack of liquidity could easily see things get very whippy.

GBP: No news, no fun

Sterling continues to look for anything that can buck it up in some way but has so far failed in that regard. The political backdrop remains one of significant intransigence with the broad feeling from those in Westminster that a breakthrough on Brexit is unlikely before the European elections towards the end of May.

It, therefore, stands that a breakthrough on sterling is unlikely before then as well.

Mark Carney, Governor of the Bank of England, speaks in London today although his comments are unlikely to touch much on monetary policy ahead of Thursday’s Quarterly Inflation Report. We expect the Bank to continue to maintain a level of two-way risk in sterling i.e. arguing that interest rates could go higher in the even that a Brexit deal is agreed but that a no-deal scenario would hold significant challenges for the UK economy as a whole.

Have a great day.