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Market Analysis

Fundamental Analysis: Pound Flat as Shares Drop

May 29, 2019
BY Michael Stark

The pound sterling hasn’t moved much today despite losses for British shares. Ongoing debate over the Conservative Party’s leadership contest has driven some volatility. Meanwhile trade wars and growth have affected trading differently across pairs.

Cable remains comfortably above $1.26 so far today, unchanged from today’s opening just below $1.266. The picture was similar against the yen at ¥138.43 and the Aussie dollar at A$1.827. However, EURGBP posted a fairly small loss to 88 pence.

Shares down but Brexit latest unclear

The FTSE 100 has made a significant loss today of about 1.5%. Some of the worst performers have been NMC Healthcare, Tesco, British American Tobacco, and other trade-sensitive companies. China’s latest threats to extend its trade dispute with the USA to rare earth metals have brought these tensions back to the fore. High interest in British shares from abroad means that the correlation between the FTSE and sterling is relatively strong.

British politics has mostly been a volatility factor for the pound so far this week. Mrs May’s upcoming resignation and replacement might lead to essentially more of the same in a moderate leader. On the other hand, the chances of a hard Brexit might have increased somewhat given some of the possible candidates for the next PM.

Another growth warning

The ECB’s latest warning that slower growth threatens financial stability was a hit to sentiment on the pound as well. The UK would be among the countries least prepared to handle such developments given the economic impact of Brexit itself.

Vice-president of the ECB Luis de Guindos also noted in today’s report that ‘persistent downside risks to growth reinforce the need to strengthen balance sheets of highly indebted firms and governments’. This might refer specifically to Italy, but the UK’s government debt was still about 85% of GDP at the end of 2018.

In general, then, these factors have acted against the pound more strongly when it comes to performance against the yen and dollar. Other currencies such as the euro and Aussie dollar face many similar risks to the pound.

Friday’s data day for the pound

Although most of this week is empty in terms of major releases from the UK, tomorrow and Friday feature a number of important figures. The most important of these is tomorrow night at 23.00 GMT, and that is GfK consumer confidence. The reading hasn’t been above zero in more than three years, and the consensus this time suggests a figure of about -12. This would be a slight improvement on previous figures for 2019 so far.

A range of statistics on lending is due on Friday morning. Change in housing prices (nationwide, monthly and annual) is due at 06.00 GMT, followed by consumer credit and net lending at 08.30. Predictions indicate broadly stable figures with some slight improvements. If true, the pound might receive some fundamental support.

Of course, traders should be mindful of politics and Brexit this week. Finding the next Prime Minister is likely to be a long process, but the emergence of a clear favorite could drive some movement for the pound. Finally, there’s data affecting paired currencies, especially American GDP tomorrow at 12.30.

Fundamentals suggest losses for GBP

Overall, the pound’s fundamentals so far this week are fairly negative. In the absence of significant surprises in stock markets, trade disputes, and the leadership contest, the most favorable outcome is probably a small decline for sterling over the next few days.

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