Reflecting on May: Sterling weakness, Euro strength

How political events have impacted the pound and euro

We reflect on how the upcoming UK election impacted the pound and how a reduction in political uncertainty in Europe led to strength in the euro.

Sterling weakness

What has happened?

Sterling was one of the weakest performing major currencies in May. The pound declined 0.5% versus the US dollar and 3.5% against the euro.

Why?

The pound rallied during April as UK Prime Minister Theresa May called a general election, with expectations high that the Conservatives would be able to increase their majority, strengthening the government’s position as it heads into Brexit negotiations. However, the most recent polls, less than a week before the vote, suggest that the Labour Party are gaining momentum. A Bloomberg produced composite of UK election polls gives the Conservatives just a 3 point lead over the opposition, down from 24 points on 19 April.

What should you take away from it?

It hasn’t been a particularly good year for pollsters. Most polls came down on the wrong side of the both the Brexit and US presidential votes, so it is worth bearing in mind that they may be wrong again heading into next week’s election. However, it does seem clear that the election is no longer the foregone conclusion that it was once considered to be. As we have seen over the past 12 months, political events and indeed the market reaction to them are difficult to predict.

Euro strength

What has happened?

European assets performed well in May. The euro rallied by 3.2% versus the US dollar, while equity markets in the single currency bloc outperformed a number of their peers in US dollar terms.

Why?

The strong performance of European assets and in particular the euro during the month can be attributed to some extent to a reduction in political uncertainty and continued strong economic performance from the single currency bloc. Although the potential for an early Italian election had a negative impact towards the end of May, the election of Emmanuel Macron as the French President at the beginning of the month was well received, ending concerns of a victory for the anti-euro Marine Le Pen and sparking a rally in the single currency. On the data front PMI surveys for the region remain strong, with the composite survey sitting at its highest level in six years.

What should you take away from it?

Politics and macroeconomic data continue to be important drivers of financial assets and should continue to be closely followed over the coming months. Although the result of the French election was well received, political uncertainty persists, particularly in Italy where an election looks likely to take place before the end of the year, with the anti-establishment Five Star Movement amongst the frontrunners. Meanwhile, the strength in economic survey data has in some cases failed to translate into ‘hard’ economic data, with ECB President Mario Draghi stating that while downside risks to the eurozone recovery have diminished, they still remain.