Labour’s day in the UK?

The dollar remained under pressure yesterday on the back of a slew of generally softer than expected US economic data, with the euro and sterling rising to intra-day highs of $1.0817 and $1.2760 respectively before easing back a little. They are trading at $1.0790 and $1.2740 this morning, with EURGBP little changed from yesterday morning at around £0.8460.

Following a six-week campaign, voters in the UK go to the polls in today’s general election. Sterling has remained very steady really since Rishi Sunak called the election on 22 May, probably reflecting the fact that a Labour victory in the election, whenever it was called, has looked a foregone conclusion for some time now, while the prospect of a Labour government clearly hasn’t frightened financial markets. With the size of Labour’s overall majority the only question to be answered it seems, a stable political backdrop will be supportive of the pound. That said, post-election, the markets’ attention may quickly turn to the outlook for Bank of England monetary policy and the timing of any cut in UK interest rates, which could weigh on the currency.

Reflecting the weak economic data, US government bond yields headed further south yesterday with 10-year yields falling by about 7bps. UK 10-year yields fell by around 8bps, while equivalent German yields were only marginally lower (2bps) on the day. In equity markets, European stocks played catch-up with Tuesday’s rally in US indices, adding more than 1% yesterday. The S&P 500 had another positive session, gaining around 0.5% to close at a new all-time high.

Of the US economic data published yesterday, most notable perhaps was the fall in the ISM index of services activity, which unexpectedly dropped into contractionary territory (below 50) in June. Together with the weak reading for the equivalent index of manufacturing activity last month, it does seem as if economic growth has stepped down recently, having been remarkably resilient during the course of 2023 in particular.

It is very quiet on the economic data front today, particularly given Independence Day in the US, with  construction PMIs in the UK and Germany the only releases of any note. Tomorrow though sees the publication of the key employment report in the US.