Today’s market analysis on behalf of Samer Hasn Market Analyst and part of the Research Team at XS.com

The British pound is trading almost flat today against the US dollar, near the 1.27550 level, after two days of notable gains. The same applies to the euro pound, which is holding near the level of 0.84693.

The pound’s quiet movements today come with anticipation of the results of the today’s UK parliamentary elections, coinciding with the decline in liquidity with the holiday in the US markets and the anticipation of crucial labor market data there for tomorrow.

While the faster-than-expected slowdown in the growth of construction activities hindered the progress of the pound, which was trying to benefit from the rise in British gilts yields while exploiting the inactivity of the US bond market.

While the opposition Labor Party is preparing to record a historic victory over the Conservative Party, which will lose control after 14 consecutive years. This expected historic defeat for the Conservatives, which will be announced tomorrow morning, comes after years of crises that befell the British economy, whether from the wars raging around the world, the consequences of Brexit, and the spread of the epidemic, which were ultimately reflected in the ignition of inflation and the decline in the purchasing power of individuals.

While in May, Prime Minister Rishi Sunak called for early general elections, taking advantage of the tangible economic improvement in various aspects, including the decline in inflation, which recently reached 2% – the level at which it needs to average around to achieve the Bank of England’s target.

This anticipated shift in the UK’s partisan landscape has had some impact on the real estate and housing sectors, with the uncertainty that has accompanied it. Today, we witnessed the S&P Global construction PMI report for the month of June, in which the pace of activity growth declined, worse than expected, below what it was in the previous two months, in light of the decline in housing market activity in exchange for the growth in commercial activities that kept the index in the positive territory.

The report indicated that uncertainty regarding the election results had somewhat slowed the growth of orders and new business. On the other hand, companies expanded their sub-contracting and purchasing activities in June, with continued optimism about the possibility of obtaining more contracts during the next 12 months, supported by expectations of the possibility of lowering the interest rate as well.

Also in the housing market, tomorrow we await the reading of the Halifax House Price Index for June, with expectations for housing prices to grow by 0.2% on a monthly basis.

Aside from the UK, today’s 4th of July holiday in the US will cause a limited market response with lower liquidity. Markets are also awaiting non-farm payrolls data from the Bureau of Labor Statistics tomorrow, which will help strengthen or modify expectations about the Federal Reserve’s next steps in upcoming meetings.

While worse-than-expected data for ADP non-farm employment, rising unemployment claims and a shock from the ISM services PMI helped strengthen hope of the possibility of an interest rate cut next September or November. This comes with signs of a cooling labor market and a decline in economic activity.

Weak figures from the US economy helped push Treasury bond yields lower yesterday, while British gilt yields today are trying to maintain the gains they recorded at the opening, which helps reduce the yield gap and provides some support to the pound as well.

I believe that the pound may be subject to more pressure in light of the developments we are witnessing in the course of the presidential race in the US, where polls indicate a significant advance for Republican candidate Donald Trump.

This is because Trump has promised tax cuts, which have sparked controversy because they will contribute to increasing the deficit, igniting inflation, and thus increasing the need for bond offerings, which will increase the supply, pushing yields higher. This, in turn, may widen the yield gap between US bonds and the rest of the bonds of advanced economies, which may enhance the strength of the dollar.

Let us not forget the state of uncertainty that Trump may create if he wins, with the unexpected steps taken regarding many extremely important issues at the economic and foreign policy levels.