Election Ahead For UK, Aussies Cut Rates To Fresh Record Lows
Jeremy Cook | May 05, 2015 05:36AM ET
We’re finally there.
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In a few short days, the UK will go to the polls and a new political story will take over; the campaign will be over, the coalition building will begin and Sterling will remain in the firing line. Polls over the weekend have shown that the major parties are tied at 33% of the vote – a hung parliament is guaranteed. Friday’s falls in the pound across the board were not particularly election related however, but as a result of a sign of the UK’s slowing recovery.
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According to the latest PMI release, the strong pound is starting to hurt the competitiveness of the UK’s manufacturing industry, especially within the Eurozone. While the domestic market is still showing strength, the 12% gain in GBP against the European single currency in the past year is starting to hurt our manufacturers and exporters.
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Brighter news was found in the jobs component of the release with April marking two years of continual increases in employment within manufacturing, although wage increases seem to be far from dependable. Costs are falling as a result of a higher pound and this will be seen in consumer baskets as the supply chain progresses, not exactly helping the wider inflation picture and damaging thoughts of a Bank of England rate rise anytime soon.
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This release isn’t particularly bad news, but shows how fragile the manufacturing sector remains and calls into question the belief that interest rates need to rise, something that would only strengthen sterling further.
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Our final look at the election, including our summary of what could happen to the pound given the unique nature of the possible outcomes, will be published this afternoon. My thoughts on the wider election issues (housing, Europe, debt, jobs) as part of our election countdown series can all be found at http://www.worldfirst.com/uk/blog/currency-transfer-news . I hope you find them useful.
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Aussie central bank cuts rates
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As we warned on Friday, of the central banks that the market is keenly watching for additional interest rate cuts (the Reserve Banks of Australia and New Zealand alongside the Bank of Canada) it is the Australians who I would be watching the closest and overnight they gave the market what they wanted.
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Interest rates have been cut to 2.00% in Australia, a new record low, with Governor Stevens reiterating that “the inflation outlook provided the opportunity for monetary policy to be eased further, so as to reinforce recent encouraging trends in household demand.” The cut has not had the desired effect on the currency, however, with AUD moving higher after the announcement; markets clearly believe that this is the last bullet from the RBA’s gun.
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IMF fire off Greek warnings
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Euro is lower this morning following a report in the FT over the long weekend that the IMF is close to cutting off support to the Greek state unless creditors decide to write off a “significant portion” of its debt. Greece is waiting on just over EUR7bn of bailout funding in the coming months, with over half of that amount to come from the IMF. We have another Eurogroup meeting next Monday and I am sure that we will see some progress on the negotiations there. They simply have to or we are back to talking about a Greek exit from the Eurozone. The day ahead
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Following a poor contribution to Q1 GDP figures, UK economy watchers will be hoping that the construction sector bounces back handily in Q2, although if Friday’s manufacturing PMI is anything to go by we could be waiting on another disappointment. Markets are looking for another softening of growth with the election likely viewed as a catalyst for negative sentiment. The PMI release is due at 09.30.
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