Market remains convinced of a Conservative majority

The population of the UK will go to the polls today for the third time in five years. The stalemate created by spoiling tactics adopted by opposition Parties over Brexit may come back to bite them as the outgoing Government is returned with a working majority.

Since the election was announced the pound has rallied strongly on hopes of a Brexit settlement. This is a strong indicator that despite debates over the NHS, law and order and education, this election is ‘all about Brexit’.

Any kind of opinion poll publication is banned until after the polls close this evening so the YouGov poll published yesterday which showed a narrowing lead for the Conservatives remains the most recent data.

In a frantic final day of campaigning, it was impossible to predict just where the Leaders of the three main parties would pop up next. Each ended the day with a rally to cement their policies in the mind of the electorate.

The apparent narrowing of the Conservatives lead did little to disturb sterling which inched higher yesterday in very thin trading. It reached a high of 1.3214, closing at 1.3207. Against the euro, it was a slightly different story and the single currency rallied following recent weakness., The pound fell to a low of 1.1814, closing at 1.1857.

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FOMC dampens rate expectations

The financial markets had become so used to an optimistic outlook from the Federal Reserve that they had managed to convince themselves that not only would the next move in short-term interest rates be a hike, but it awaited confirmation of the fact from Jerome Powell following yesterday’s FOMC meeting.

As it happened, the Fed was more cautious than expected and that drove the dollar to its lowest level against the single currency in over a month.

The Fed’s more dovish outlook compounded concerns over today’s ECB meeting and the threat that the U.S. will enact further tariffs on imports from China when the deadline expires this Sunday.

At his press conference, Fed Chairman Powell placed greater emphasis on the trade talks than the market expected. He is clearly concerned about the effect of the continuing stalemate on the economy given the effect further tariffs would bring since they are certain to the copied by Beijing.

The Fed has cut once more than the market had expected so rates are below expectations right now and the fact that the Fed feels that the current level is ‘appropriate’ shows a degree of concern for growth and inflation.

There remains a degree of confusion over interest rates. The futures are pricing in a further cut in 2020 while commentators talk of rates being on hold through the entire year with hikes coming in ‘21 and ‘22.

With a Presidential election coming next year and the threat of impeachment next month, the Fed is probably wise the prefer caution.

The dollar index traded through support at 97.20 yesterday, reaching a low of 97.04 and closing at 97.15. Overnight it has continued to weaken, so far 05.15GMT) reaching 97.04 again.

‘Biggest test’ unlikely to conclude rate speculation

New ECB President Christine Lagarde will preside over her first meeting of the Governing Council of the Central Bank later this morning and later give her first press conference.

She has had an inordinately long ‘lead in’ to her first meeting but given the fixed term, that ECB Presidents receive, this was probably entirely planned.

The jury remains out on Ms Lagarde’s credentials but nevertheless, it was clear that more is needed to stimulate the economy than yet another bureaucrat filling the role.

While commentators had been prepared to allow Lagarde this meeting to get to grips with the challenges ahead by expecting no change to monetary policy, there could easily be a surprise in either word or deed as she immediately states her case for the stimulation of the economy.

While she was given the job due to her political affiliations and experience, it is unlikely that her first press conference will be overly political. She is sufficiently astute to realize that she needs a ‘crowd pleasing’ start and that will most probably revolve around setting out the tasks that lay ahead from a monetary policy perspective.

The euro rallied yesterday in conjunction with a weakening of the dollar. It reached a high of 1.1146, closing at 1.1138. Today could be another busy day for the single currency. It is hard to gauge just what is expected from the ECB meeting which leads to uncertainty over the reaction of the market.