Dollar Outperforms as Politics Continue to Weigh on European Currencies
What’s been happening?
Pound Sterling – UK Markets
The pound sterling suffered heavy losses against both the dollar and the euro on Wednesday as investors continue to stay away from the currency while the British political drama unfolds. During Wednesday’s PMQs, British Prime Minister Theresa May announced that the Withdrawal Agreement Bill will be published on Friday and will be put to a vote in parliament after recess. Meanwhile, political correspondents reported that the number of lawmakers voicing their displeasure with the PM’s “new Brexit deal” was rising rapidly, reigniting talks of heightened pressure on PM May to resign.
"I will be meeting the prime minister on Friday following her campaigning in the European elections tomorrow and following that meeting I will be consulting with the 1922 executive," the head of the Conservative Party's 1922 Committee, Graham Brady, told reporters on Wednesday. Later in the day, the leader of House of Commons, Andrea Leadsom, announced her resignation via Twitter. “It is with great regret and a heavy heart that I have decided to resign from the Government,” Leadsom said. "I no longer believe that our approach will deliver on the referendum result," Leadsom wrote in the letter. "I considered carefully the timing of this decision, but I cannot fulfil my duty as Leader of the House tomorrow, to announce a Bill with new elements that I fundamentally oppose." In response to this development, PM May’s spokesman said that the PM was disappointed with Leadsom’s decision but she was still focused on delivering the Brexit people voted for.
The data published by the UK’s Office for National Statistics on Wednesday showed that inflation, as measured by the Consumer Price Index (CPI), rose 0.6% and 2.1 on a monthly and yearly basis in April. The core CPI, which excludes volatile food and energy prices, stayed unchanged at 1.8% annually in April and fell short of the market expectation of 1.9%. The soft inflation, which is likely to allow the BoE to stay on hold with regards to rate hikes, data weighed on the currency. Other details of the report revealed that the Producer Price Index (PPI) and the Retail Price Index (RPI) rose 2.1% and 3%.
US Dollar – US Markets
The greenback preserved its strength against its major rivals and the US Dollar Index rose for the seventh time in the last eight trading days. In the minutes of its May meeting, the FOMC repeated that a patient approach to determining future adjustments to the target range for the federal funds rate was appropriate in the current economic environment. Regarding the inflation outlook, “Many participants viewed the recent dip in PCE inflation as likely to be transitory,” the FOMC noted. The fact that the FOMC’s May meeting took place before the U.S.-China trade conflict escalated caused investors to largely ignore the statement.
In the meantime, James Bullard, president of the St. Louis Federal Reserve, on Wednesday argued that a rate cut could become a “more attractive option” if inflation continued to disappoint. On the same note, “The underlying price trends point to inflation staying around the Federal Reserve's 2% target,” New York Fed President Williams said.
Euro – European Markets
In the absence of significant macroeconomic data releases and fundamental drivers, the shared currency continued to outperform the British Pound while struggling to stay resilient vs the dollar. The data from Germany showed that the real GDP expanded by 0.6% and 0.4% in the first quarter on a yearly and quarterly basis, respectively, to come in line with the market expectation. Although European Central Bank president Draghi and other members delivered speeches in the day, they didn’t touch on the economic or the monetary policy outlook.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK and markets will be keeping a close eye on political developments.
US: The IHS Markit will release the preliminary Manufacturing and Services PMI reports alongside the weekly jobless claims data. Later in the day, FOMC members Kaplan, Daly, Bostic, and Barkin will be delivering speeches.
EU: The European economic docket will feature the IHS Markit’s Manufacturing and Services PMI data from the euro area and Germany. The Ifo Institue is scheduled to publish Germany’s sentiment report, which includes the Expectations, Business Climate, and Current Assessment indexes, as well.