GBP Pares Losses But Huge Uncertainty Remains

Equity markets in Europe are expected to start the week a little softer, with the FTSE leading the losses as the UK index pares Friday’s gains and is weighed down by small gains in the pound.

FTSE Lower But GBP Weakness Remains Supportive

The UK index came under some early pressure in futures markets on Friday as it became clear that we were headed for a hung parliament but as has now become the norm, it quickly rebounded to end the day more than 1% higher.

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While the negative knee jerk reaction to these results continues to be happen, the time taken to recover is getting shorter and shorter, with traders perhaps learning from past experience and capitalising on any dips.

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GBP Vulnerable as May’s Weak and Unstable Government Prepares For Talks

Sterling’s sell-off on Friday clearly aided the bounce, ending the day more than 1.5% lower against the dollar and vulnerable to further downside.

With Theresa May scrambling to repair the self-inflicted damage suffered as a result of the election, there remains a huge amount of uncertainty around her position and with only a week to go before Brexit talks with the EU begin, I feel there may be a few more twists to come yet. May has not delivered the strong and stable government she wanted and instead looks weak and vulnerable. I find it hard to see how she recovers from this.

The Aftermath

Fed, BoE and BoJ to Come Later in the Week

While the election result and upcoming Brexit talks will likely remain a key talking point this week, there’s also a number of other events that markets will be very focused on. The start of the week may be quiet but we’ll get monetary policy decisions from the Federal Reserve, Bank of England and Bank of Japan on Wednesday, Thursday and Friday, respectively. The Fed will be of particular interest with markets now fully pricing in a rate hike and instead more concerned with whether they’ll signal another this year or focus more on balance sheet reduction.

For a look at all of today’s economic events, check out our economic calendar.

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