Could European elections topple PM?
Today's news headlines:
- 'Pound tumbles to four-month low amid speculation over Theresa May's future’. Sterling falls below $1.27 against the US Dollar as calls for Theresa May’s resignation grow; further potential downside is yet to come. (The Daily Telegraph)
- 'Trade war sparks fears of China weaponising US Treasuries’. The strained trade relations between the US and China could be poised to deteriorate further following Beijing’s unexplained sale of $20 billion worth of US government debt earlier this year. (Financial Times)
Brexit pressures Pound
Theresa May is under increased pressure to stand down following her last failed bid to pass her Brexit legislation. Against the Euro, Sterling has now posted losses for each of the last thirteen sessions and the expectation of another drubbing for the Conservative Party in today’s European elections is adding further downside pressure on the Pound. Significant gains for hard-line pro-Brexit parties and the imminent departure of Theresa May are both expected which could mean more pain for Sterling.
For many years, China has been amassing US government debt and now holds in excess of $1.2 trillion worth of Treasuries. The unexplained sale of 20 billion in US Treasuries (approx. 2.0% of its holdings) has caused some speculation in the market that this is a move to undermine the US. This could add further fuel to the ongoing trade spat, but largely, this is a misunderstanding of the role of Treasury securities. The rationale for Chinese investment in US Treasuries is due to its large USD trade surplus, the proceeds of which must be invested (mattresses won’t do). It bears remembering that declining trade between the US and China—perhaps due to tariffs—will reduce the Dollar surplus held by China, and thereby Chinese holdings of US Treasuries. However, the potential for this false narrative to serve as a political device is all too real.
The Pound fell to fresh lows for the year against the US Dollar yesterday as uncertainty over Brexit and the UK government continued to mount. The pair has now lost more than five cents from its highs earlier this month, and with the potential for legacy parties to see significant losses in today’s European elections, downside pressure on the Pound could prevail.
The Euro remains under pressure against the US Dollar, with uncertainty over the European elections weighing on sentiment. The potential for populist parties to make big gains cannot be understated, which in turn, could lead to laxer budgetary rules among member states.
The Pound saw further losses against the Euro during yesterday’s session with Brexit and UK political uncertainty in focus. However, given the potential for a meaningful shift in spending policies for the Eurozone economies to emerge off the back of the MEP elections, Sterling may find a temporary reprieve.