Pound fights back but traders remain wary ahead of EU elections

Sterling started off the week in generally positive form as traders bought it back off its lows of last week. This was due to a mixture of profit taking in rival currencies and the news that Theresa May planned a ‘new and improved’ Brexit deal.

Sterling is very mixed today, with GBP/EUR down slightly at €1.1387, GBP/USD falling to $1.2697 and GBP/CAD slipping slightly to C$1.7052, while GBP/AUD jumps higher to AU$1.8473 and GBP/NZD rises to NZ$1.9517.

Today’s Bank of England inflation report hearings could be influential for the pound, although markets remain nervous ahead of this weekend’s EU elections and the rise of the Brexit Party.

What’s been happening?

Yesterday was a better day for Sterling against the majority of its rivals, although it did fall sharply against the Australian dollar following the surprise weekend election result which saw the ruling coalition retain power against the predictions of the polls.

Global trade tensions took a turn for the worse with news that US internet giant Google was severing ties with China’s Huawei following the Trump administration’s sanctions against the company.

This had the effect of bolstering safe haven demand at the expense of risk sensitive currencies, such as the Canadian and New Zealand dollars, although the Australian dollar escaped unscathed on account of the election result.

The pound benefitted from a lack of new Brexit developments, with Theresa May’s promise of a ‘new improved’ EU divorce deal somehow lending support to the UK currency.

It remains to be seen whether this support will carry through to today however, as the Bank of England’s inflation report will give markets an idea of whether the UK central bank is achieving its target inflation remit, with any miss likely to scare traders away from the pound.

What’s coming up?

Looking to the week ahead, markets are becoming increasingly wary of the upcoming EU elections, which are predicted to see a huge surge in support for Eurosceptic parties across the continent, as well as expected gains for the UK’s Brexit Party at the expense of the traditional parties.

Such anxieties are serving to limit demand for both the pound and the euro, with traders likely to go short on both currencies for the rest of the week.