Sterling outperforms on FX markets today after Scottish parliamentary elections removed short term political risk. PM Sturgeon’s SNP came one seat short of an outright majority, denting her independence claim. However, together with pro-independent Greens, Holyrood will definitively give it its best shot. Sturgeon said she’ll seek a referendum during the first half of her tenure and by spring 2022 at the earliest. The UK focus remains on fighting the pandemic first. While UK PM Johnson’s conservatives can’t democratically stop Scotland from moving forward, they’ll do anything to slow the process towards a referendum. In 2014, 55% of Scottish votes were again independence, but the dreadful brexit process and the fact that Scotland voted pro-EU suggest that the balance might have shifted. It would mark a further crumbling of the UK after the EU-UK trade deal put a de facto border between Northern Ireland and rest of Britain. A very extensive test of EUR/GBP 0.87 resistance was finally called off with sterling shorts throwing the towel. EUR/GBP drops one big figure to 0.86 and could be looking for the EUR/GBP 0.8472 YTD low. Today’s sterling strength and Friday’s dollar weakness propelled cable in no time from 1.39 to 1.4150 with the YTD high at 1.4237 coming within reach. Up next for UK investors: Q1 GDP data on Wednesday. Quarterly data are expected to show a 1.6% decline, but will be labelled outdated after for example last week’s bullish economic assessment by the Bank of England.
The dollar fails to overcome Friday’s weakness and even starts drifting lower again as the US session gets going. The trade-weighted dollar risks losing the 90 big figure with EUR/USD currently changing hands around 1.2170. No wonder given the continuing divergence between inflation expectations and US reals yields (also today). The former add 3 bps while the later cede 3 bps. Net impact on the US yield curve: basically flat (in nominal terms). Intraday changes on the German yields curve are negligible as well. Commodities steam ahead with metals taking the lead. Iron ore and steel rose more than 6% with copper (all-time high)) and aluminum (highest since 2011) gaining 1.5% to 2% on the day. There’s no specific trigger with the underlying narrative unchanged. Ultra-easy monetary policies and fiscal boosts are stoking a huge economic recovery with risks clearly tilted to the inflationary side. US April headline inflation is expected to rise to an eye-popping 3.6% Y/Y on Wednesday. It would be the 2nd highest outcome in over a decade. Underlying core CPI is expected to jump to 2.3% Y/Y, which would also near the top levels since 2009. The inflation debate complicates the timing of the US Treasury’s mid-month refinancing operation. It sells $58bn 3-yr Notes tomorrow, $41bn 10-yr Notes on Wednesday and $27bn 30-yr Bonds on Thursday. Investors might especially be wary to pick-up the supply at the (very) long tenors. Main European stock markets ceded marginally ground today.
Riksbank governor Ingves said there is still “considerable scope” for more stimulus should it be needed, meeting minutes showed. The repo rate can be cut, he said, even though room to do so “may not be so large”. The central bank could also scale up asset purchases or introduce new credit facilitating measures. Ingves expects inflation to be volatile in coming months and it will take time before being permanently close to the 2% target. The economic outlook looks “somewhat brighter” but risks remain. The Swedish krone loses some territory (EUR/SEK slightly up in the 10.12 area) though that’s mostly a reaction to the minor risk-off setting.
In an interview, Chicago Fed Evans said the dreadful April jobs report was probably a one off, associated with the complexities op reopening the economy. He expects job growth to be strong this year but added that it will take some time for the Fed to see enough data to judge the progress towards the FOMC’s goals. Evans is a voter this year.