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    Sterling rallies after U.K election victory for Cameron government

    GBP

    The pound appreciated significantly against all other G10 currencies with sterling trading above 1.55 versus the dollar and 0.725 versus the euro on Friday.

    With the Conservatives winning an absolute majority, the political outlook is more stable for the time being than anticipated.

    Analysts do not anticipate the election outcome to affect the economic outlook, indeed they expect growth to pick up in the coming quarters mainly due to two factors. Firstly, increasing employment and positive wage growth for the first time since 2009 should boost private consumption. Secondly, with growth accelerating in the rest of Europe, foreign demand for UK goods should increase, to some extent counteracting the effects of a strong pound.

    However, the promised EU in/out referendum means the economic outlook medium to long-term is more uncertain.

    The referendum is set for sometime in 2017 once the Cameron Government has renegotiated membership terms. This process is going to be difficult given the UK’s insistence on limiting the key issue of the free movement of labour, since this is considered one of the tenets of membership and according to Jean-Claude Junker, the EU President, would be considered an unacceptable major treaty change, although Junker has said he is willing to negotiate a ‘fair deal’ for the UK.

    Currently 46% of the population want to stay in against 36% who want to come out, and 15% are undecided.

    John Wraith of UBS Group AG. said today “The initial impact ( sterling surge) will of course come from the strong Tory win which will be seen as good for all sterling markets, however, there will be some anxiety soon about the proposed EU referendum and the possible rate hike by the BOE later this year which may deter some overseas investors.”

    USD

    The dollar rose marginally on Friday after data showed a recovery in Non-Farm Payrolls, which came out higher than previously, and just 5k short of the 228k expected, at 223k.

    The fact that the previous result was revised down even lower to 85k did take some of the shine off the reasonably strong figures, however.

    The Unemployment Rate came down to 5.4% from 5.5% previously in line with expectations, and gets ever closer to the 5.2% threshold where some Fed members see the Fed’s mandate of Maximum Employment achieved.

    Average Hourly Earnings rose to 2.2% from 2.1%, however, this as still below analysts estimates of 2.3%, indicating something was still preventing generous wage growth.

    Labour Force Participation rose to 62.8% and other data showed the Baker Hughs U.S Rig Count fall to 894 in week ending May 8.

    EUR

    The euro weakened on Friday after German Industrial Production slid to 0.1% from 0.2% previously in March (yoy) when a rise of 0.5% had been forecast.

    The German Trade Balance, meanwhile rose to 23.0bn – higher than the 19.5bn previously and the 20.0bn expected.

    Vice-President of the ECB Vitor Constancio gave a speech in London in which he reiterated the ECB’s commitment to its ECB programme.

    He further added that the recent bond market volatility was merely a “correction” and would not change the ECB’s plans.

    On Greece, he said he did not foresee a “worst case scenario” evolving, and collateral haircuts had been discussed in regards to Greece.

    This counteracted to some degree commentary from an unacknowledged source within the ECB who said that Greece would struggle to make its next payment and that creditors were still far from signing off the bailout money.

    JPY

    The yen continued to trade against the dollar within the tight May range on Friday, trading at 119.69 midway through the New York session.

    The Bank of Japan policy meeting minutes showed the unity of policy makers has cracked. BOJ board member Takahide Kiuchi urged the central bank to immediately reduce its annual bond purchase target by almost half to 45 trillion yen per year. The proposal was met with stiff resistance from other policy-setters who argued that cutting asset purchases before the target inflation goal is reached would likely limit the effects of the policy. Therefore within the backdrop of the collapse of the price of oil the BOJ, as has been reported, abandoned its informal time frame for reaching the 2% inflation target.

    The central bank now expects to reach its 2% inflation level in the first half of 2016 depending on the movement of oil prices.

    In addition some BOJ members warned that private consumption remained tepid despite improvements in the job market, underscoring the lack of confidence among the policy makers over the strength of the Japanese economy, the BOJ minutes showed.

    GBP

    The pound appreciated significantly against all other G10 currencies with sterling trading above 1.55 versus the dollar and 0.725 versus the euro on Friday.

    With the Conservatives winning an absolute majority, the political outlook is more stable for the time being than anticipated.

    Analysts do not anticipate the election outcome to affect the economic outlook, indeed they expect growth to pick up in the coming quarters mainly due to two factors. Firstly, increasing employment and positive wage growth for the first time since 2009 should boost private consumption. Secondly, with growth accelerating in the rest of Europe, foreign demand for UK goods should increase, to some extent counteracting the effects of a strong pound.

    However, the promised EU in/out referendum means the economic outlook medium to long-term is more uncertain.

    The referendum is set for sometime in 2017 once the Cameron Government has renegotiated membership terms. This process is going to be difficult given the UK’s insistence on limiting the key issue of the free movement of labour, since this is considered one of the tenets of membership and according to Jean-Claude Junker, the EU President, would be considered an unacceptable major treaty change, although Junker has said he is willing to negotiate a ‘fair deal’ for the UK.

    Currently 46% of the population want to stay in against 36% who want to come out, and 15% are undecided.

    John Wraith of UBS Group AG. said today “The initial impact ( sterling surge) will of course come from the strong Tory win which will be seen as good for all sterling markets, however, there will be some anxiety soon about the proposed EU referendum and the possible rate hike by the BOE later this year which may deter some overseas investors.”

    USD

    The dollar rose marginally on Friday after data showed a recovery in Non-Farm Payrolls, which came out higher than previously, and just 5k short of the 228k expected, at 223k.

    The fact that the previous result was revised down even lower to 85k did take some of the shine off the reasonably strong figures, however.

    The Unemployment Rate came down to 5.4% from 5.5% previously in line with expectations, and gets ever closer to the 5.2% threshold where some Fed members see the Fed’s mandate of Maximum Employment achieved.

    Average Hourly Earnings rose to 2.2% from 2.1%, however, this as still below analysts estimates of 2.3%, indicating something was still preventing generous wage growth.

    Labour Force Participation rose to 62.8% and other data showed the Baker Hughs U.S Rig Count fall to 894 in week ending May 8.

    EUR

    The euro weakened on Friday after German Industrial Production slid to 0.1% from 0.2% previously in March (yoy) when a rise of 0.5% had been forecast.

    The German Trade Balance, meanwhile rose to 23.0bn – higher than the 19.5bn previously and the 20.0bn expected.

    Vice-President of the ECB Vitor Constancio gave a speech in London in which he reiterated the ECB’s commitment to its ECB programme.

    He further added that the recent bond market volatility was merely a “correction” and would not change the ECB’s plans.

    On Greece, he said he did not foresee a “worst case scenario” evolving, and collateral haircuts had been discussed in regards to Greece.

    This counteracted to some degree commentary from an unacknowledged source within the ECB who said that Greece would struggle to make its next payment and that creditors were still far from signing off the bailout money.

    JPY

    The yen continued to trade against the dollar within the tight May range on Friday, trading at 119.69 midway through the New York session.

    The Bank of Japan policy meeting minutes showed the unity of policy makers has cracked. BOJ board member Takahide Kiuchi urged the central bank to immediately reduce its annual bond purchase target by almost half to 45 trillion yen per year. The proposal was met with stiff resistance from other policy-setters who argued that cutting asset purchases before the target inflation goal is reached would likely limit the effects of the policy. Therefore within the backdrop of the collapse of the price of oil the BOJ, as has been reported, abandoned its informal time frame for reaching the 2% inflation target.

    The central bank now expects to reach its 2% inflation level in the first half of 2016 depending on the movement of oil prices.

    In addition some BOJ members warned that private consumption remained tepid despite improvements in the job market, underscoring the lack of confidence among the policy makers over the strength of the Japanese economy, the BOJ minutes showed.


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