Good morning

Absolutely amazing!! Any uncertainty surrounding the UK elections has now passed and the new Conservative (MAJORITY yippee) govt. can get on with making the UK economy a powerhouse of world economies. The electorate has spoken and spoken loudly. As for those protesters on Saturday, shame on you all. As you know the GBP rallied marvellously as the exit polls came out on Thursday and despite a decent showing on Friday’s NFP (+223k) the GBP has remained resilient and above the 1.54 handle. As the even risk has passed GBP FX volatility has “collapsed” as expected with the 1m now 9% mid (from over 12), 3m 8.90% mid and 1y 8.5% mid, while in EURGBP 1m 9.10%, 3m 8.65% and 1y 8.25%…..all in line with a what the market expected with a Conservative majority. Going forward I believe FX vols should find a base here given the event risk that still exists in Greece. No solution has been found or come close to finding which in turn will keep the options market “on its toes”.

Despite the more positive picture in the EU (data, excl Greece), the EU continues to face an uphill climb one which will see the EUR downtrend continue. The overall picture for the EU has not changed and with the expected rise in US interest rates in September, the EUR will face the guillotine. As you know PARITYFX continues to cal for EURUSD PARITY (1.00:1.00) circa Q3 and this will drive the USD higher vs all her trading partners (G7). So getting back to the state of the GBP, despite the new majority government, the USD will take centre stage again and rise. Bottom line, the net effect will see the GBP weaken again vs the USD, but vs the EUR we still see the GBP strengthening as a result of the divergent state of the economy between the 2 unions.

The Eurogroup meets today to discuss the ongoing negotiations with Greece. While negotiations are still on a knife’s edge, the recent shake up politically in Greece has given Troika hope that a solution can and will be found. In fact as we mentioned last week, the ECB passed a €2bn lifeline to Greek banks. This week’s sees another repayment due from Greece and it will be interesting to see if they can come up with the cash. Greece is still holding out short-term for the further €7.2bn, money which is seen as desperately needed to keep the country on her feet.

Later today we hear from the BoE regarding the interest rate decision plus QE total. No change is expected. Wednesday sees the BoE publish the labour report and Inflation report. These 2 data are CRUCIAL to the question of when the BoE is likely to raise rates in the UK and in turn the GBP. With the recent disappointing data, Wednesday’s report will in all likelihood show a slowdown in the UK economy, a further interest rate hike delay, lower GDP and the result should see the GBP suffer further against the USD especially.

Big news over the weekend as we have mentioned here several times, the PBoC (China) cut both the benchmark deposit and lending rates by 0.25% to 2.25% and 5.10% respectively. The big winner was the AUD which rose initially to 0.7930 before settling back to 0.7900. i think the PBoC will now give it a couple months and see how these recent cuts filter into the economy before deciding what to do next. Suffice to say they have more ammo and can continue cutting rates.

In summary, for this week I see the resumption of the USD rally and sell off in emerging market currencies.

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