What’s been happening?

Pound Sterling – UK Markets 

The British pound struggled to find demand on Tuesday as investors are opting out to remain on the sidelines while trying to figure out the potential implications of the political developments in the UK. The currency weakened against the dollar to erase the gains it recorded following PM May’s resignation announcement and stayed unchanged vs the euro.

While speaking to reporters on Tuesday, British Environment Minister and one of the candidates to become the next Prime Minister, Michael Gove, argued that they had to leave the EU ahead of a possible snap election, explaining that the Conservative Party would be beaten by opposition Labour Party leader Jeremy Corbyn. “We will be punished at the ballot box, Corbyn will be in Number 10 propped up by the SNP, and Brexit may well be reversed altogether," Gove said. 

On the other hand, Trade Minister Liam Fox stated that it would be unfortunate and surprising if the EU refused to negotiate changes to the Brexit deal. “That would increase the chances of a no deal exit,” Fox added. It didn’t take long European Commission President Jean-Claude Juncker to respond to these comments by reiterating that the Brexit Withdrawal Agreement Bill won’t be re-opened. Finally, Irish Prime Minister Leo Varadkar said that the risk of a no-deal was growing and called upon "whoever gets the top EU jobs at the European Commission” to understand Ireland's concerns about Brexit. 

US Dollar – US Markets

The greenback took advantage of the risk-off atmosphere on Tuesday and outperformed its European rivals, which are more sensitive to shifts in the market mood. The US Dollar Index rose to its highest level in five days while the 10-year U.S. Treasury bond yield dropped to its worst level since September of 2017.

The S&P/Case-Shiller House Price Index in March came in at 2.7% on a yearly basis to beat the market expectation of 2.6% but was ignored by the participants. Other data from the U.S. showed that the Conference Board’s Consumer Confidence Index improved to 134.1 in May from 129.2 to help the dollar gather strength. Commenting on the data, "Expectations regarding the short-term outlook for business conditions and employment improved, but consumers’ sentiment regarding their income prospects was mixed," Lynn Franco, Senior Director of Economic Indicators at the Conference Board said. "Consumers expect the economy to continue growing at a solid pace in the short-term, and despite weak retail sales in April, these high levels of confidence suggest no significant pullback in consumer spending in the months ahead.”  

Euro – European Markets

The shared currency posted losses vs the dollar on Tuesday as it failed to attract investors amid mixed macroeconomic data releases and political uncertainties following the European parliamentary election. In its latest business and consumer survey on Tuesday, the European Commission reported that the Consumer Confidence Index rose to -6.5 in May from -7.3 in April to match the market consensus. “The improvement of euro-area sentiment resulted from higher confidence in the industry and, to a lesser extent, in services and among consumers, while confidence remained virtually flat in retail trade and cooled down significantly in construction,” the EC noted in its press release. Meanwhile, the European Central Bank announced that private loans grew by 3.4% on a yearly basis in April and the M3 money supply expanded by 4.7% in the same period.    

What’s coming up? 

UK: There won’t be any macroeconomic data releases from the UK on Wednesday.  

US: The Richmond Fed Manufacturing Index will be the only data featured in the U.S. economic docket. Markets will be paying close attention to T-bond yields as well.

EU: Germany’s Destatis will release unemployment data. Bundesbank President Weidmann is scheduled to deliver a speech as well. Other data from the euro area will include inflation report from France and the KOF leading indicator from Switzerland.