European Currencies Recover Amid Month-End Flows
What’s been happening?
Pound Sterling – UK Markets
After extending its weekly slide to its lowest level since early January against the greenback, the British pound staged a modest recovery and closed the day in the positive territory while ending the day virtually unchanged vs the euro.
The data published by the Bank of England on Friday showed that net lending to individuals on a monthly basis in April rose to £5.2 billion from £4.7 billion and came in higher than the market expectation of £4.6 billion. Further details of the report revealed that the total consumer credit in the same period rose to £942 million and mortgage approvals increased to 66.261K from 62.559K.
Meanwhile, the Director-General of the Confederation of British Industry (CBI), Carolyn Fairbairn, published a statement on Friday detailing expectation of business from the new PM. “Firms large and small are clear that leaving the EU with a deal is the best way forward,” Fairbairn said. “The vast majority of firms can never be prepared for no-deal, particularly our SME (small and medium-sized enterprises) members who cannot afford complex and costly contingency plans. We have a clear message for the next Conservative leader and future Prime Minister. Champion business.”
US Dollar – US Markets
The US Dollar Index, which measures the greenback’s value against a basket of six major currencies, erased all of its weekly gains on Friday as the latest data from the U.S. hinted that the slowdown in inflation may not be temporary as the Fed has been claiming.
According to the U.S. Bureau of Economic Analysis, the core Personal Consumption Expenditure (PCE) Price Index, the Fed’s preferred gauge of inflation, rose 1.6% on a yearly basis in April, falling short of the Fed’s 2% target rate for the seventh straight month. Other details of the publication showed that personal spending in April increased by 0.3% and personal income rose by 0.5% on a monthly basis.
Meanwhile, the University of Michigan said that the Consumer Confidence Index fell to 100 in May’s final reading from 102.4 in the previous estimate to reflect the negative impact of the U.S.-China trade conflict on consumers. "The late-month decline was due to unfavourable references to tariffs, spontaneously mentioned by 35% of all consumers in the last two weeks of May, up from 16% in the first half of May and 15% in April and equal to the peak recorded last July in response to the initial imposition of tariffs," the UoM said.
Later in the day, Fed Board of Governors Vice Chair Richard adopted a dovish tone to further weigh on the dollar. “We are attuned to potential economic risks that could call for more accommodative policy,” Clarida said and recognized the softness in inflation by noting that the latest data came in lower than their expectation.
Euro – European Markets
Although the shared currency faced some selling pressure earlier in the day on Friday amid disappointing data, it was able to post daily gains against the dollar. However, the lack of euro-positive fundamental drivers suggests that the currency’s performance on Friday was likely fueled by profit-taking on the last day of the month.
Germany’s Destatis announced that retail sales in April contracted by 2% following March’s 0.2% decline and missed the market expectation for an increase of 0.1%. Other data from Germany showed that inflation, as measured by the Consumer Price Index (CPI), was expected to rise 1.4% on a yearly basis in May following April’s 2% reading.
On Italy-related headlines, European Central Bank (ECB) Governing Council member and Bank of Italy Head Ignazio Visco told CNBC that it was an “absolute necessity” to improve Italy’s growth potential and added that the increase in the 2019 Italian debt-to-GDP ratio could exceed the forecast reported in the government's budget.
What’s coming up?
UK: The IHS Markit will release the Manufacturing PMI (May-final) on Monday.
US: The IHS Markit’s and the ISM Manufacturing PMI reports will be featured in the U.S. economic docket alongside the U.S. Census Bureau’s construction spending figures.
EU: The IHS Markit will publish the Manufacturing PMI data for Italy, France, Germany, and the eurozone on Monday.