Political risks keep Euro on back foot

24 May, 2019

It’s been a horrid month for Theresa May, as uncertainty around the fate of the UK Prime Minister and her Brexit plans have sent the Pound plummeting towards the 1.26 psychological mark. The departure of  Leader of the House of Commons, Andrea Leadsom, the 36th Ministerial resignation during May’s reign as PM, highlights the draining support for May’s Brexit deal, while raising the risk of a hardline Brexiteer potentially taking over the reins at 10 Downing Street.

The GBPUSD’s previous floor around the 1.30 level was predicated on the United Kingdom being able to avoid a no-deal Brexit. However, the doors to that psychological support level have been left wide open following the concerns from investors over the feared prospects of an increased worst-case scenario for Brexit.

The ongoing political saga can by all means eventually lead to another general election or potentially a second referendum, with either outcome opening up the doors for further volatility in the Pound.

Given the record losing streak in the Sterling that has seen the British currency drop against the Euro for 13 consecutive days, alongside the Sterling being the worst performing currency in the G10 this month with losses close to 3%, it is clear that the downside is where the Pound is the most vulnerable right now.

European Parliament elections likely not enough to deter Euro’s 2019 bearish trend

The European Parliament elections kick off Thursday and will go on through Sunday, adding another layer of risk to the Euro which has already declined by over 2.7 percent so far this year against the US Dollar. Should populist and Eurosceptics see gains at the polls, that is expected to exert more downward pressure on the Euro which is already suffering from the resumption of the Eurozone’s economic woes.

However, even a Euro-positive outcome from the elections and the shoring up of support for the EU establishment, will likely not be enough to significantly alter EURUSD’s 2019 bearish trend.

With both Brexit uncertainties and US-China trade tensions threatening to inflict more damage on the EU economy, any post-election reprieve for the bloc’s currency would likely prove short-lived, as markets refocus attentions to macro global headwinds.

EU, UK political uncertainties strengthen Dollar’s support

With the Euro and the Pound accounting for a large proportion of the US Dollar Index (DXY), the political risks that are weighing on the EU and the UK are translating into support across the Atlantic for the US Dollar. The DXY was further supported by the latest Fed minutes, which indicated that the central bank is set to remain patient on US interest rates “for some time”, while showing support for Fed Chair Jerome Powell’s “transitory” view on inflation.

As the latest Fed minutes should push back against market expectations for lower US interest rates this year, this should have a subsequent downside limitation to the Greenback. As long as the US economy doesn’t show meaningful signs of a sharper economic slowdown and the trade tension concerns continue to linger in the atmosphere, this should help support the “resilient Dollar” narrative.

US-China tensions remain primary driver of global risk sentiment

Most Asian stocks are in the red on Thursday morning, as regional currencies turn in a mixed performance against the Greenback, as the region continues to showcase its sensitivity to the US-China trade outlook.

Judging by how Gold has traded around the mid-$1,270 range this week, while USDJPY continues to hover above the psychological 110 level, markets appear to have priced in the recent deterioration in US-China relations, but remain on edge awaiting the next catalyst that could swing risk sentiment either way. Overall, the likelier base case for investors is that the US-China tensions will persist, which is a far cry from the prospects of a formalized US-China trade deal that anchored market expectations up until April.

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