Conservative majority

GBP – Markets expect Conservative majority

Markets wait for the general election result with the opinion polls still pointing to a Conservative majority.  Sterling touched its highest level since 2017 against the euro and also moved up against the US dollar.  An exit poll will be available as soon as the polls close at 10pm on Thursday. This is usually more reliable than the current polls.  Several constituency results will be available before midnight.  We will be here watching the results  and reaction through the night.  Volatility is expected through the night, though the result is likely to be known by early morning. 

A record number of late registrations suggest we could see a high turnout. If those new voters are younger, that may boost the Labour vote. Some analysts argue that a December poll could discourage some older voters, who tend to vote Conservative. Finally, forecasts tend to assume a uniform swing across the country.  This is particularly uncertain as Brexit views may have a decisive impact on voting intentions.

A Conservative win is likely to lead to some further sterling appreciation.  Any increase, may be limited as the focus will then shift to the next round of trade negotiations with the EU. If we don’t see a Conservative majority, it is likely to be a hung parliament. Further uncertainty would likely hurt sterling.

GBPEUR – 1.1904

GBPUSD – 1.3172

EUR – ECB rate decision

The ECB meeting this week will be the first with new President Lagarde at the helm. Her initial comments have shown support for previous policy actions.  She has also emphasised that fiscal policy needs to lead any further attempts to stimulate growth. The ECB is likely to take a similar position to the Fed for now and say it is on hold while it watches developments. There have been some that this year’s slump in manufacturing activity is bottoming out. However, the weak October German industrial production showed that the sector remains fragile. Surveys also suggest that services activity may be slowing.

If more stimulus is required, there is a growing feeling within the ECB that conventional monetary policy tools and asset purchases may have hit their limits. A further move into negative territory may be counterproductive.  This is now leading many economists to forecast that the ECB will avoid any more cuts unless the economy weakens significantly. It is now likely the ECB will hold rates for an extended period.  The ECB has promised a review of monetary policy early next year.

EURUSD – 1.1065

EURGBP – 0.8400

USD – Fed likely to hold rates

The ongoing trade tensions between the US and China remain a key focus for markets. Conflicting indications on a near-term deal continue to add volatility to markets. On 15th December, the US is scheduled to hike tariffs on a range of imports from China. Markets will be looking for an agreement or for the hikes to be postponed by then.

When  the Fed cut interest rates by 25bp in October, it signalled that it was likely to now pause and study their impact. We expect rates to be held this week, despite calls from President Trump for further cuts. They will also update their interest rate projections, which seem likely to suggest leaving rates on hold for an extended period.   Market expectations are that there may be at least one more rate cut next year.

Recent US data has continued to be mixed. Consumer spending remains a key support to grow and November retail sales are forecast to show another rise. Reports of sales on Black Friday and beyond suggest that these have beaten expectations but it is unclear just how much of that will be captured in November data. Inflation is expected to have picked up in November but not to an extent that would concern the Fed.

GBPUSD – 1.3172

EURUSD – 1.1065


Do get in touch if you would like to discuss further.

*Interbank rates correct as at 7 am on the date of publishing.