UK Faces New Challenges for EU Exit

Weekly Report - 12/06/2017

Hung UK Parliament Increases Brexit Negotiation Headwinds, Sinking Pound


Prime Minister Theresa May’s plans to help consolidate power in the House of Commons backfired spectacularly last week after her Conservative Party’s majority was whittled away, creating the need to form a coalition government.  The resulting steep drop in the Pound reflected the heightened uncertainty with Brexit negotiations rapidly on the advance.

Last Week

Political factors continued to dominate financial market headlines last week after the UK general election results were tallied.  The loss of the Conservative’s majority in the lower house of UK Parliament could cause significant turmoil, with GBPUSD falling 300 pips before recovering modestly as a immediate kneejerk reaction to the “hung parliament.”

Staying in Europe, the latest Euro Area GDP results came in stronger than anticipated for the first quarter of 2017, with quarterly growth accelerating to 0.60% while annualized expansion climbed to 1.90%.  Nevertheless, the European Central Bank refrained from adjusting monetary policy for the period, instead downgrading the inflation outlook.

The Reserve Bank of Australia also opted to leave interest rates unchanged at a record low 1.50%.  Although the economy managed to avoid a recession, maintaining the non-recessionary streak, weak household spending and growth alongside gains in the housing market remain notable risk factors.

Shifting gears, China reported inflation and trade data, with the surplus rising month over month after  import and export increases surpassed market expectations.  While consumer price inflation managed to gain ground, producer price growth continued to decelerate.

Finally, Japanese GDP growth disappointed relative to forecasts after quarterly expansion was a tepid 0.30% and a more modest 1.30% pace of gains on an annualized basis.


The Week Ahead

With UK elections in the rearview mirror, the focus shifts towards upcoming decisions from key global central banks.  A major decision will arrive from the US Federal Open Market Committee which is expected to raise rates by 0.25%.  An important takeaway from the Fed’s statement will be the likelihood of an additional hike before the end of 2017.  Upcoming inflation figures could derail a more hawkish statement, with headline inflation forecast to slow to a 2.00% annualized pace as core inflation remains steady at 1.90%.

The Bank of England Monetary Policy Committee is also announcing interest rates, with no change to policy expected.  Following the election results, the Central Bank is likely to highlight their accommodative abilities.  While inflation is forecast to remain high at 2.70% annualized growth, the rate of monthly increases is slowing.

No major fireworks are anticipated during this month’s Swiss National Bank decision, with rates forecast to remain on hold at a record low -0.75%.  Until the ECB shifts its own stance, the SNB is unlikely to commit to any interest rates adjustments.

To cap off the week, the Bank of Japan will also be announcing its own monetary policy decision, with interest rates expected to be left unchanged as inflation remains well below the targeted levels.


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