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Watching the European elections and preparing for another UK referendum
May 22, 2019 11:21 amVideo
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The US dollar continues to strengthen in relation to its main competitors, which are under pressure from political and economic factors. On Tuesday, the USD index hit the highest level since April 25.
“Greenback is still ahead of most of its G10 competitors, as key countries face pressing economic and political problems, while the Fed ignores calls for lower interest rates, as the US economy remains stable,” said Vin Qin, currency strategist at Brown Brothers Harriman.
“Bull drivers for the dollar now come from outside the United States. Events in other regions suggest that the subject of divergence is alive and well. So, the Reserve Bank of Australia made it clear that it could lower the interest rate next month. In Japan, the central bank continues large-scale incentives. The Turkish Central Bank, in turn, relaxed the policy, while the weak statistics from Thailand and Korea emphasizes that the divergence and includes EM, “he added.
This week, in addition to the trade relations between Washington and Beijing, the European parliamentary elections, which will be held from May 23-26, are in the focus of attention.
Populists ruling in Italy have already declared that they may violate the EU budget rules. If they show strong results in the upcoming elections, the yield of Italian government bonds may increase sharply, and the volatility will increase. The victory of their allies in ideology on the other side of the Old World could harm the pound and the euro, increasing the likelihood of the implementation of the “tough” Brexit and complicating the situation for those who want to maintain closer ties with Europe.
New government in Italy
It is expected that the Italian party “League of the North”, one of the leaders of which is Matteo Salvini, can increase the number of its seats in the European Parliament from the current 6 to 27. This result can either strengthen the tough position of the Italian authorities in discussions about the budget deficit with Brussels, or destroy ruling coalition in the country.
“I am waiting for a tangible protest vote. If the League of the North returns with the result, which polls are mainly hoping for, and we get similar results in other places, this will lead to a very interesting state of affairs in terms of budget rules, “said James Atie of Aberdeen Standard Investments.
While for JPMorgan Chase, the baseline scenario is the collapse of the Italian government in the summer, Goldman Sachs relies on the country’s ruling coalition to continue and continue to oppose the EU budget constraints.
Party Brexit
Initially it was assumed that the United Kingdom by now would already withdraw from the EU, but the impasse with the promotion of the “divorce” agreement in the British parliament led to the fact that the country was forced to participate in the elections to the European Parliament, which will start tomorrow. According to recent polls, the Brexit party, founded by Nigel Faraj, who opposes relations with the EU, can show better results, and the UK-ruling Conservative Party is in danger of being defeated.
“A major victory of the Brexit Party may lead to an increase in calls for T. May to leave the post of prime minister, which, in turn, may cause the pound sterling to fall by 2% against the dollar. There is a possibility that T. May will be replaced by a supporter of the “tough” Brexit, “Nomura experts believe.
In the evening, the GBP / USD pair soared by more than 100 points and updated local maxima in the region of 1.2810. The driver of such a movement were reports about the possibility of holding another Brexit referendum. However, the British currency quickly lost its positions against the dollar.
Scotiabank considers a decline in investor optimism to be quite natural.
“While the idea itself looks quite positive for the pound sterling and is likely to be favorably received by the EU, the issue is still not resolved. May is ready to give a voice to the people, so that he will decide the fate of the transaction she is promoting, and this requires that parliamentarians first approve it. Such an opportunity will be presented to them by the first week of June, “representatives of the financial institute stated.
“At the same time, T. May’s approach to obtaining support from members of the House of Commons raises questions. In her speech, the Prime Minister tried to respond to the concerns of each of the parties – Brexit supporters of the same party, the Democratic Unionist Party of Irish and Labor Party advocates for the protection of workers’ rights and environmental protection. However, such a position threatens that no one will be satisfied, and T. May will once again fail the vote, “they added.
The complexity of the euro
The single European currency is still trading against the US dollar near two-year lows.
In addition to fears about sluggish inflation in the EU and a stalling economic growth in the region, an increase in populism on the continent becomes an additional factor of pressure on the euro.
According to the UBS Group, any indication that populism in Europe is likely to have peaked could lead to a stronger euro, especially with respect to such protective currencies as the Swiss franc.
Other market participants are less confident in the prospects of the single European currency. In particular, Aberdeen and JPMorgan occupy short positions in the euro against a basket of currencies, including the US dollar and the Japanese yen.
The material has been provided by InstaForex Company – www.instaforex.com
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