The British pound has started the week with moderate gains. In Monday’s North American session, GBP/USD is trading at 1.2920. On the release front, British Services PMI was a disappointment, dropping to 53.8 in May. This missed the estimate of 55.1 points. In the US, ISM Non-Manufacturing PMI pointed to a slowdown in the services sector, dropping to 56.9 points. This was shy of the estimate of 57.1 points. Later in the day, the UK releases BRC Retail Sales.
The terrorist attack on London Bridge has badly shaken the UK, and the timing couldn’t be worse for Prime Minister Theresa May. Just a few weeks ago, May appeared destined to increasing her majority, and the election was little more than a formality. However, two major terrorist attacks in Manchester and London have turned the political landscape upside down, and May’s comfortable lead in the polls has largely evaporated just three days before the vote on Thursday. The latest YouGov poll predicts that May’s Conservatives will fall just short of a majority. If this happens, May will have a much more difficult job negotiating Britain’s departure from the European Union, and the pound could drop sharply. Meanwhile, the economy appears to be slowing down, and the opposition parties will be hoping to gain seats at May’s expense, appealing to an electorate which is greatly concerned about the economy as well as the deteriorating security situation. Traders should be prepared for volatility from the pound this week.
The Federal Reserve holds its policy meeting on June 14, and the odds of a quarter-point increase continue to climb. According to the CME Group, the odds of a hike have climbed to 96%, up from 88% just a week ago. The markets have priced in a June move, and a dismal Nonfarm Payroll report has failed to put a dent in market confidence in a June rate hike. Traders should note that ahead of the March hike, the odds of a rate hike were also close to 100%, and the dollar actually lost ground after the Fed followed through with a quarter-point increase. An increase in interest rates represents a vote of confidence in the US economy, but the Fed continues to have some concerns. Inflation remains stubbornly low, despite a labor market that remains close to capacity. Fed policy makers are also scratching their heads over soft consumer spending, which has not kept pace with high levels of consumer confidence. As for additional rate hikes in the second half of 2017, the markets are skeptical, with the odds of a September rate hike at just 26%.
