Pound Goes Crazy

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Market Drivers May 31, 2017
Cable stays heavy on election woes
EZ data in mixed
Nikkei 0.14% Dax -0.08%
Oil $48/bbl
Gold $1263/oz.

Europe and Asia:
AUD Private Sector Credit 0.4% vs. 0.4%
EUR GE Retail Sales -0.2% vs. 0.2%
EUR GE Unemployment -9K vs. -15K
GBP Mortgage Approvals 64.6K vs. 66K

North America:
CAD GDP 8:30
USD Chicago PMI 9:45
USD Pending Home Sales 10:00

The pound was rocked both ways in overnight trade today after a series of polls provided conflicting opinions regarding the state of the UK election. First, early in the Asian session a YouGov poll suggested that Conservatives may actually come up short of majority by as many at 16 seats, putting PM May’s government at a steep disadvantage.

However, sterling’s fortunes quickly turned when a new poll by Panelbase put Conservatives at 48% and Labor at 33% providing a very comfortable cushion. PM May made a calculated decision to call early elections in hopes of garnering a supermajority in Parliament that would allow her to conduct Brexit negotiations from strength. But over the past few weeks she stumbled badly on the campaign trail forcing her to change policy on several domestic issues.

If Ms. May does indeed eke out a smaller victory than expected, it would be one of the biggest blunders in recent political memory. The campaign has already invited comparisons of a conservative version of a Clinton campaign, where the inevitable winner manages to bungle the election.

Ms. May’s position is nowhere as dire, and with only a little more than a week to go, she seems to have stabilized her support, but UK polls are notoriously unreliable and the electorate appears to be fluid. Still, it’s remarkable that PM May is struggling against an opponent who is disliked by 80% of the members of his own party who would prefer to remove him as a leader.

One thing is clear for the FX markets, however. For the next week, GBPUSD will be vulnerable to every poll headlines that hits the screen, especially if Labor begins to pick up momentum once again. The pound dropped to a low of 1.2768 in overnight trade only to rocket back to 1.2850 and for now, that range is likely to contain the action for the day, but unless the market becomes convinced that PM May has the election well in hand, GBPUSD will continue to be very volatile.

Elsewhere, the North American docket contains only second tier data with Chicago PMI and Pending homes on the calendar and action should be relatively subdued as we await key ADP and ISM data tomorrow. USDJPY remains under pressure, however, and any negative reading today could push it towards a test of 110.50

Boris Schlossberg
Managing Director

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