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Political uncertainty weighs on sterling.

By Jake Trask

Downward pressure has been added to sterling over recent days as rifts within the Conservative party re-emerge over the future customs relationship the UK will have with Europe post-Brexit. With sterling already suffering from yet another change of tune from Bank of England Governor, Mark Carney re: interest rate rises; divisions at the top echelons of UK government have done little for the mood of pound bulls. GBP/USD dipped below 1.34 yesterday for the first time this year and looks likely to remain under pressure until the divisions can be healed, which is far from certain. Should weekend reports that a snap general election be called come to fruition then we can expect another leg lower. Tomorrow sees top-tier UK data kick-off with crucial inflation numbers released. The Consumer Price Index is expected to remain at 2.5% y/y so anything higher may add some relief to the pound. Today we have public sector net borrowing with a £7.2B deficit predicted for April. GBP/USD is around 1.3470 at present rising a short time ago on the back of some slightly hawkish comments from MPC members testifying to the Treasury Select Committee.

The dollars bull-run has slowed over the past 24 hours as traders take stock with possibly one eye on Wednesday night's FOMC Meeting Minutes from May 2nd's get-together. As 10 year Treasury yields continue to rise in line with expectations of four 2018 hikes from the Fed the dollar has rallied over recent weeks and we may get extra momentum should the minutes from the meeting show both September and December are seen as live meetings. Current expectations are for three hikes this year with one in June fully priced in however chances of four this year are rising towards 50/50. EUR/USD has just retaken 1.18 and USD/JPY is around 111 ahead of a relatively quiet day data-wise. Its likely Trump, North Korea and trade will be the main influence over the greenback today.

Much of Europe enjoyed a long weekend with the Whit Monday holiday being observed throughout the continent. There is no data of note today from Europe so it’s likely to be Italian politics which dominate the headlines. Coalition talks are ongoing with the Five Star and Northern League populist party’s reportedly favouring political novice Guiseppe Conte to be next Prime Minister. Controversial policies they are looking to enact include a lower flat rate income tax, basic payments to the poor and a loosening of EU fiscal rules in an effort to increase borrowing. Given that Italy has Europe’s largest debt pile it appears the proposals will be met with stiff resistance especially from Germany. We get the next snap-shot of the EZ’s economic health tomorrow with the monthly PMI gauges expected to show a slight slowdown in output. GBP/EUR trades around 1.1375.

An easing in rhetoric from US officials over threats to impose tariffs on Chinese imports saw the commodity currencies rally on Monday. AUD/USD pushed back through 75 cents and is just below 76 cents as I write as a risk on environment returned to the markets. It’s very quiet with regards to Australian data this week so the FOMC minutes will likely be the next big driver of the Aussie. GBP/AUD trades at 1.7735.

Canadians enjoyed a public holiday yesterday in observance of Victoria Day. Brent Crude Oil hovering around $80 a barrel and the aforementioned diffusing of a potential US/China trade war have added support to the loonie at the start of the week. GBP/CAD trades at 1.7190.

Like the Aussie the Kiwi headed higher yesterday as risk returned to the market. It seems likely that NZD/USD will face stiff resistance at 70 cents especially given the lukewarm reception New Zealand Prime Minister, Jacinda Ardern’s first budget recently received. Next data of note from NZ is tomorrow nights trade balance figures. GBP/NZD is at 1.9350.