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Northern Ireland election weighs on pound

Daily Currency Update

The Northern Ireland Assembly elections weighed on the pound on Monday. The political uncertainty created by Sinn Fein winning by a majority has contributed to GBP/USD remaining below the $1.24 handle and GBP/EUR below €1.17. Sinn Fein now holds the most seats and the DUP who came second say they will not nominate ministers until issues regarding the Brexit trade arrangement and the imaginary border down the Irish Sea are resolved. Investors tend to move towards the safe-haven US dollar during times of uncertainty.

Political and economic uncertainty has not helped support the pound. Monetary Policy Committee member Michael Saunders spoke yesterday, where he warned that inflation may peak above 10% and the economy could grind to a halt and possibly slip into recession, echoing comments made by Andrew Bailey last week at the Bank of England’s rate decision. Markets are still forecasting for potential further interest rate increases from the BoE, however, some economists believe we may see a pause in August, depending on economic data releases.

Key Movers

The US dollar is still going from strength to strength. The US dollar index is trading at 19 year highs, EUR/USD is trading at around a five year low, and USD/JPY is trading close to a 20 year high. Risk aversion in global financial markets continues to support the US dollar, with the prospect of a rapid monetary policy tightening cycle from the US Federal Reserve also supporting this move higher. In the next two meetings we could see a 0.5% interest rate increase, however, they may then slow to 0.25% increases at future meetings.

Some economists are predicting that we could see tightening of policy from the European Central Bank, possibly as early as next month. However its more likely that this will begin in September. The euro finds itself in a similar situation to the UK and interest rate hikes could be detrimental to the currency and the economy if the accompanying outlook is seen as being as gloomy as the recent one from Andrew Bailey in the UK.

Expected Ranges

  • GBP/USD: 1.2280 - 1.2405 ▼
  • GBP/EUR: 1.1640 - 1.1735 ▲
  • GBP/AUD: 1.7680 - 1.7795 ▲
  • EUR/USD: 1.0505 - 1.0595 ▼