As interest rate expectations rise, certain higher-yielding stock market sectors may lose their attractiveness on valuation concerns. So far, however, we haven’t seen a big enough drop to validate this view, but that could only be a matter of time.
The euro has been largely out of favor during the past five days and is set to end the week lower against most of her rivals. Thus, any strength in the pound is likely to be expressed in the euro/British pound currency pair in the short-term, as it was at the time of this writing.
The European Central Bank’s monetary policy decision is scheduled for tomorrow, along with the ECB press conference. Up until now, the ECB has resisted calls to start the process of tightening its policy. But there has been speculation that the Bank’s President Mario Draghi will start preparing the market about the prospects of tapering its massive QE stimulus program earlier than expected. There are two reasons for that: (1) noticeable improvement in Eurozone data and (2) pressure from Germany, where several officials including Chancellor Angela Merkel have recently called for tighter ECB monetary conditions.
What a comedy show this is turning out to be. Last night saw sterling tumble after research by the Times newspaper and YouGov suggested that there could be a hung parliament. Today, it retraced all of those losses after a Panelbase Poll showed that the Conservatives’ lead was not only intact but that it had risen to 48% from 47% previously, while the Labour party remained unchanged at 33%.
After stronger than expected readings for UK CPI, wages and employment figures in the past couple of days, today saw retail sales come in at 2.3% for the month of April, which was significantly higher than expected. The pound jumped above $1.30 as we had anticipated yesterday following the retail sales data. You can read our British pound/U.S. dollar (GBP/USD) currency pair report by clicking here.
The euro continued its recent ascent thanks to the market-friendly outcome of the German regional election, and previously the French general election. When the single currency rises in a “risk on” market environment, the euro/Japanese yen (EUR/JPY) currency pair is usually the euro pair that tends to outperform as the safe haven yen takes a back seat.
The initial outcome on Sunday night had the YM gapping up but dropping lower immediately for the classic gap and fade. The ship steadied by Monday morning but it remained off the high. Elsewhere, the EUR/USD was a golden spiral 263 days off its high as of Friday’s close and the open on Sunday night was negligibly lower and by the morning drifting lower.
Although UK’s FTSE100 attempted a miraculous rebound during early trading via sterling weakness, sellers simply exploited the technical bounce to drag prices lower. Wall Street may be in store for further punishment moving forward as risk-off is the name of the game ahead of the meeting between Donald Trump and Chinese President Xi Jinping.
The euro/British pound (EUR/GBP) currency pair may start to ease as speculators potentially reduce their record net short positions in GBP and increase their bearish bets on the euro. However, the long-term outlook on GBP remains uncertain, so we are only expecting – at this stage – a moderate GBP recovery relative to EUR.