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Fundamental Analysis: Pound falls to six-week low after UK elections

In this week’s fundamental analysis, The British pound fell to a 6-week low after the UK elections resulted in a hung parliament, with no one party gaining an outright majority victory. The pound plummeted towards 1.27059 against the US Dollar on Friday, after previously trading at 1.29620 the day before.

Current British Prime Minister Theresa May faced calls to step down as the Conservative party leader, as her decision to call a UK election proved to be a major error on her behalf. The official result showed the Conservative Party gained 318 seats, leaving it short of the 326 seats needed for an overall majority victory. The Labour Party, led by Jeremy Corbyn, gained 216 seats.

Theresa May later struck a deal with Northern Ireland’s Democratic Unionist Party (DUP), which will enable the Conservative Party to form a government. The Conservative party’s coalition with the DUP helped it to reach the 326 votes needed to form a majority government, as the DUP party had earlier won 10 seats.

It still remains unclear whether the deal will be a formal coalition or a more loose “confidence and supply” arrangement. The former would give the DUP a degree of control in government, while the latter would see the party support the Conservatives’ policies in return for some of its policies being enacted.

The election result added to uncertainty ahead of the Brexit negotiations, which are due to begin in just 10 days’ time. It has also significantly raised the chances of the UK leaving the European Union without securing a deal. At present it remains uncertain whether Theresa May will be leading the United Kingdom in negotiations, as opposing parties call for her to step down, with reports citing Boris Johnson as the favourite to replace Theresa May as British Prime Minister.

The European Central Bank (ECB) this week met in Tallinn, Estonia and increased their forecasts for economic growth in the Eurozone, but kept interest rates on hold.

ECB President Mario Draghi also hinted that there was no need to cut rates any further. Speaking at the ECB conference, the ECB head told reporters “we are now confident that inflation will converge with our objectives”.

The ECB now expects growth across the Eurozone to be 1.9% in 2017, compared with its earlier forecast of 1.8%. It also increased its growth projection for 2018 to 1.8% from 1.7%, and for 2019 to 1.7% from 1.6%.

Mario Draghi said, “The risks surrounding the euro area growth outlook are considered to be broadly balanced”. This was a marked change from his comments in April, which described the risks to growth as “tilted to the downside”. The ECB downgraded its outlook for inflation to 1.5% in 2017, from 1.7%. It also revised its inflation outlook for the following years to 1.3% in 2018, and 1.6% in 2019.

The euro currency reacted negatively to Mario Draghi’s policy statement, briefly slipping under the 1.12 level, and after previously trading at a new high 2017 high at 1.12817.

Traders had previously expected that the ECB President would give a clear indication to financial markets that the European Central Bank, would now start to taper down the current QE programme in place, as the Eurozone economy begins to recover, with economic data particularly strong in the past few months.

This is it for this week’s fundamental analysis see you next week.

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