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UK to vote with Labour holding a large lead

Thursday is polling day for the UK general election and recent surveys suggest Labour is set for a comfortable majority in parliament, with most expecting it be more than 100 seats. The markets appear settled on that result, and we don’t expect that such an outcome will have any significant effect on sentiment. With no likely surprises in store from the UK election and no important UK data releases this week, I suspect the markets won’t move that much, if at all.

One piece of under-reported news from last week was the upgrade to UK growth in Q1, combined with an unexpected rise in the household savings ratio to more than 11%. Is there more resilience in the UK economy than is being credited for?

  

French election uncertainties and Euroland data

The first round of the French parliamentary elections concluded on Sunday with Marine Le Pen’s National Rally securing just over 33% of the popular vote. The other political parties are suggesting alliances of convenience, meaning as many as 307 seats could see third-placed candidates stand aside in an effort to reduce the gains for National Rally. It could backfire though, as there are no guarantees that voters will transfer their votes (or vote at all).

Also this week, there are releases of provisional June consumer prices data from Euroland, as well as German industrial orders and production figures for May. These could point to slowing inflation and weak activity figures, both of which would intensify calls for further interest rate reductions by the European Central Bank (ECB) and reverse the EUR’s recent limited gains, in my view.  

  

US set to release key June labour data

Last week saw the first Presidential debate between Joe Biden and Donald Trump. Biden underperformed against Democratic expectations, according to the US news media, and some Democrats questioned his suitability as presumptive nominee. Attention in the US financial markets was fleeting, and has already switched back to the economy, with this week’s US employment report for June released on Friday seen as key. Will the labour market report additional signs of labour market strength, or will there be holes in the data, including a weakening in average earnings growth and a reduction in average hours worked? If there are any signs of weakness, that would increase the risks of monetary loosening by the Federal Reserve in September, which could prompt USD weakness, in my opinion. US markets are disrupted by the Independence Day holiday, which brings forward some US data releases and concentrates the risks into four, rather than five, trading days.

National Bank of Poland expected to hold after the Czech central bank cuts

Last week the big surprise from central banks was the decision from the Czech National Bank (CNB) to reduce interest rates by 50 basis points rather than the expected 25. The Governor of the central bank, Ales Michl, stated that policy was restrictive and that the central bank could cut again at the next meeting despite the weakness this prompted in the Czech koruna. However, interest rate cuts may be put on hold for the next meeting, and ought to stem the koruna’s weakness, in my view.

  This week’s only important central bank meeting is the National Bank of Poland’s (NBP) decision on Wednesday. No change is expected from economists surveyed by Bloomberg, and I suspect there will be more interest in what Governor Glapinski says at the subsequent news conference about the potential for loosening later in the year. Even if the ECB loosens further, the NBP’s wiggle room is limited because of how the Ukraine-Russia conflict is affecting Eastern European currencies and economic stability, in my view.

 

For more NatWest insights into FX markets, listen to the Currency Exchange.

  

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