Politics Damage GBP

The European Parliament’s elections started today in the Netherlands and the UK. Results will not be broadcast until Sunday evening when all EU counties had time to vote. In the UK, conservatives are expected to drop further with the biggest winner being the Brexit party. The Conservative party is forecasted to take a paltry 10% while the Brexit party 30%. The result will likely trigger a Conservative party leadership challenge. This sizable win in the EU will encourage Hard Brexit faction of the party that is pushing for a stronger stance towards the EU. The mounting political risk has accelerated the downside in sterling across the board. After a period of malaise, the market is now pricing in “No Deal” tail risk as a solid probability. The political backdrop suggests that PM May likely to step down should her Withdrawal Agreement Bill is rejected in the early part of June. A solid showing in EU election increases the probability of a hard Brexit PM replacement is high. With Liberal Democrats gaining in the polls the most likely scenario is a choice between a hard no deal exit and general election. Brexit uncertainty will keep GBPUSD under pressure targeting uptrend support at 1.2610.

ZAR set for a rebound ahead of SARB meeting

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Ensuring its seat as South African President, Cyril Ramaphosa is facing challenges looking forward. Threats of a potential sovereign debt downgrade from Moody’s during its next assessment in November amid domestic issues relating to weakening Cabinet credibility, a worsening government budget and subdued policy reactions could have serious consequences on capital flows and the South African rand. Yet the South African Reserve Bank monetary policy meeting should give a little boost to the ZAR.

The SARB, although not expected to take any further actions on its repurchase rate (currently: 6.75%) at today’s meeting, should maintain its hawkish bias. Despite inflation data for April pointing to a slowdown, with y/y headline and core figures at 4.40% (prior: 4.50%) and 4.10% (prior: 4.40%), located in the lower part of the target corridor of 4.50%, the SARB will confirm its willingness to act if upside risk associated with the medium-term inflation outlook prevails, which should ultimately support the ZAR.

Currently trading at 14.4850, USD/ZAR is heading along 14.4055 short-term.


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