Sterling weakens after election

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialist Wednesday 03rd June 2015 10:57 EDT

Sterling hit its weakest against the dollar since the aftermath of the UK's national elections, after a speech by The Queen set in motion a referendum on the UK's membership of the European Union. An EU referendum by the end of 2017 is among a programme of new laws in the first Conservative Queen's Speech in nearly two decades.

European head of FX strategy at Credit Agricole (Adam Myers) stated that "Even though it's likely that the UK wants to stay in (the EU), any political uncertainty is as good an excuse as any to cause a bit of a squeeze or reversal in sterling positioning after what's been a strong run."The German Chambers of Commerce and Industry has said it is “astonished” that the UK is considering leaving the EU, and that an exit would be “disastrous” for both countries. 

Volker Treier, deputy chief executive of the group, said scores of German firms could easily end up taking back investment from the UK. The 400,000 people employed by German companies in Britain are among those who would be negatively affected by such a change. "We are really astonished about this referendum," he told the BBC. He added that German chancellor Angela Merkel should not offer any concessions. However, German Chancellor Angela Merkel said that she would work constructively with British Prime Minister David Cameron on reforming the European Union, reaffirming her desire to keep Britain within the bloc. "Where there's a will, there's a way," Merkel said at a news conference with Cameron in Berlin. "I will go into these discussions constructively. I want to find a solution," she added. Both leaders dodged questions about whether changes to the EU treaty were achievable before Britain holds a referendum on its membership in the EU, with Cameron saying the "substance" of reforms was the most important factor.

The main issue concerning the strength of the EURO is the Greek situation. According to a Goldman Sachs Strategist the main scenario that is likely to occur between Greece and their lenders is that the deal will ultimately end in a compromise from both sides with a period that could witness missed payments. We saw recently that the Greek Prime minister has said openly that Greece does not have the money to pay 300 million euros to the IMF on June 5. Despite this Greek Finance Minister Yanis Varoufakis expressed confidence a deal with lenders would be struck in time to avoid default. International Monetary Fund (IMF) chief Christine Lagarde said on Friday that a comprehensive deal with Greece to avoid it defaulting on loan repayments is "very unlikely... in the next few days".The news came as new figures from Greece showed bank deposits fell sharply in April to €139.4bn, a drop of €5.6bn from March and its lowest level in 10 years. The figures will raise the possibility of capital controls being imposed on the country. Although it has so far shied away from putting limits on how much depositors can withdraw, these are looking increasingly likely.

Many central banks around the world are watching whether the US dollar can regain momentum and help stimulate their slowing economies. Countries are relying on weaker currencies to boost their growth prospects in the global low interest rate environment. The US dollar has pulled back, hit by weak economic numbers that have clouded the timing for when the US Federal Reserve may finally start lifting borrowing rates. Unless the disturbed signs of a pick-up in the US economy turn into something more sustainable, a further downward drift in the world’s reserve currency stands to complicate policy for many central banks. The dollar rose against most major currencies, hitting an eight-year peak. The US economy contracted in the first quarter as it buckled under the weight of unusually heavy snowfalls, a resurgent dollar and disruptions at West Coast ports.  Economists, however, caution against reading too much into the slump in output. They argue the GDP figure for the first quarter was held down by temporary factors.

Economists estimate unusually heavy snowfalls in February chopped at least one percentage point from growth. Trade was hit both by the strong dollar and the ports labour dispute, which weighed on exports through the quarter and then unleashed a flood of imports in March after it was resolved. A measure of domestic demand growth was revised up slightly and business spending on equipment was much stronger than previously estimated, taking some edge off the slump in output. While consumer spending, which accounts for more than two-thirds of U.S. economic activity, was revised down by one-tenth of a percentage point to a 1.8 percent rate, it could finally get a lift from the considerable savings households amassed because of cheaper gasoline.

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