ttention in the UK is now firmly set on Thursday’s general election, which bodes to be a lot closer than the polls had suggested a matter of a few weeks ago. The latest opinion polls have narrowed since the Conservative Party opened up a considerable 25 point lead over Labour back in mid-April, the largest lead it has had under the existing government’s tenure. Opinion surveys from YouGov and Survation in the past week or so now give the Tories a very slender advantage of less than 4%.

One week Sterling volatility, which measures potential price swings over the next one week period, rose to its highest level since the US Presidential Election. With the margin of victory, and possibly even the actual outcome itself, now far from guaranteed, currency markets are likely to be especially volatile in the days surrounding the vote.

Elsewhere, the Euro slipped despite the release of an impressive set of PMIs that suggested the ECB could take on a slightly more hawkish bias at their meeting this week. Economic data looks to be on the light side today with all attention in the UK at least firmly on the last few polls ahead of Thursday’s vote.

Major currencies in detail

GBP

Sterling recovered somewhat on Monday as all eyes now turn to Thursday’s vote. We think only a very comfortable victory for the Conservative Party would be enough to cause any sort of sustained rally in the Pound on Friday morning when the results begin to filter through.

Traders mostly overlooked yesterday’s slightly disappointing PMI from Markit which showed the services sector grew at a slower than expected pace in May. The index came in at a fairly underwhelming 53.8 compared to the 55.0 consensus. It is, however, worth noting that this remains well above the level of 50 that denotes expansion and signs are good for a pickup in growth from the dismal 0.2% expansion recorded in the first quarter.

EUR

The Euro spent much of yesterday treading water, ending more-or-less unchanged against the US Dollar.

May’s crucial services PMI out of the Eurozone was revised upwards modestly, adding to the recent stream of economic news that suggest the Euro-area economy is set to accelerate this year. The index increased to 56.3 from the previous estimate of 56.2.

Retail sales will be released in the Eurozone this morning with Euro bulls hopeful of a slightly better reading than last week’s underwhelming inflation news. Wednesday’s GDP numbers are expected to remain unrevised and investors will instead look to Thursday’s monetary policy meeting from the European Central Bank.

USD

Key economic data out of the US continued to disappoint on Monday, providing little ammunition for any sort of Dollar rally.

The ISM non-manufacturing PMI, one of the main measures the Federal Reserve looks at when considering its monetary policy, slipped to 56.9 in May, down from the 57.5 recorded a month prior. Despite the recent slowdown in the US economy, and indeed drop off in inflation, we think an interest rate hike from the Fed this month remains very likely, with an additional hike later in the year also on the cards.

Economic news out of the US will be mostly second tier and as such we expect the Dollar to be driven predominantly by events elsewhere.