British Pound Tumbles

Daily Analysis - 09/06/2017

U.K. Election Points to Hung Parliament

The British pound fell sharply late Thursday, and is continuing to slide in early Friday trade. Exit polls are predicting that Prime Minister Theresa May's Conservative party will be deprived of a majority, after ceding big ground to Jeremy Corbyn's Labour party.

Britain Stares at Political Uncertainty

With the prospect of no party securing a majority in the British parliament, the country has plunged into uncertainty less than two weeks before key “Brexit” talks are scheduled to start.

Multiple parties hammering out a coalition government looks the most likely outcome. Investors fear this could potentially delay negotiations with the European Union, however, a cross party compromise could also lead to a softer Brexit.

This may ultimately turn out to be positive for financial markets, which have always favoured retention of the single market. Analysts believe that a political risk premium will hang over the sterling until the volatility fades.

This should put a near-term ceiling on the currency. GBPJPY shed as much as 2.00% to last trade around 140.150.

Euro Reverses From 6-Month High Post ECB Policy Update

The euro retreated from a six month high against the U.S. dollar after the European Central Bank announced a downward revision to its inflation forecasts.

The central bank’s president Mario Draghi said he now expects inflation levels of 1.50% in 2017 and 1.30% in 2018. This is down from the projections released in March, which saw inflation at 1.70% in 2017 and 1.60% in 2018.

Draghi said the downgrade reflected the recent drops in crude oil prices, but anticipated underlying inflation, which excludes volatile items, to gradually rise over the medium term.

Earlier on Thursday, the ECB announced it would hold its benchmark refinancing rate steady at 0.00%, in a decision that was widely expected. EURUSD is down in Friday morning trade to currently hover around 1.12100.

China Inflation Edges Higher

Consumer inflation in China accelerated moderately in May, as non-food prices continued to remain elevated, according to official data released Friday. The consumer price index edged 1.50% higher from a year earlier, versus the 1.20% gain in April. Non-food prices increased 2.30% year-over-year, compared with 2.40% in April. The headline inflation figure matched a 1.50% forecast by economists surveyed by The Wall Street Journal. On a monthly basis, the CPI fell 0.10% in May, the National Bureau of Statistics said. In April, it rose 0.10% from the prior month. Separately, Chinese producer prices gained for a ninth straight month, climbing 5.50% on the year in May. The reading for factory inflation also matched the consensus economist forecast. USDCNH is rising Friday to trade around the 6.78800-mark.

Copper Prices Rally

Copper notched its biggest one-day gain in two months on Thursday after severe weather disrupted some mines in South America and labor issues resurfaced in Indonesia.

Supply concerns came to the fore after snow and strong winds hit northern Chile's Atacama Desert, reducing output at BHP Billiton's Escondida and Antofagasta's Zaldivar mines.

In Indonesia, Freeport-McMoRan said it was firing 3,000 workers from its Grasberg mine, sparking labour unrest. On the demand side, stronger than expected Chinese economic data further boosted the bullish sentiment.

China reported May exports and imports figures that easily topped estimates, suggesting the economy was holding up better than previously feared.

Copper June futures soared over 1.00% in the previous trading session. Prices are however retreating modestly on Friday to last trade around $2.6010 a pound.