What’s been happening?

Pound Sterling – UK Markets 

British domestic data releases were limited yesterday whilst Eurozone developments and global markets’ reaction dominated. The UK bond yields lowered, as a sharp slide in Italian bonds prompted defensive demand for UK gilts. The British Pound yesterday declined to fresh 5-month lows close to 1.3200 against the US Dollar. 

British stocks fell on Tuesday, joining a Europe wide sell-off. Top fallers on the FTSE included Royal Bank of Scotland (RBS.L) and Barclays (BARC.L), both down more than 3%, as financials in Europe were under pressure on worries the next Italian election could turn into a referendum on the Euro.

Increasing fears over political developments in Italy are likely to complicate Brexit negotiations, with the Italian situation now likely to be a key focus at the June EU Summit. A request for a longer transition period is likely to be put forward, as a Brexit deal that suits both the UK and the EU has still not been reached. 

US Dollar – US Markets

The US Dollar saw some positive gains during yesterday’s trading hours. The US Dollar Index (DXY) clinched fresh multi-month highs just beyond the critical 95.00 reached earlier in the session, following increasing fears over the political uncertainty in Italy and its impact on the single currency via a much weaker EUR against USD rate. 

American consumers were feeling more optimistic in May following a slight drop in confidence in the previous month. US Consumer Confidence measured by the Conference Board yesterday came in at 128.0, slightly below the expectation, however higher than April’s 125.6 reading. In addition, more positive data came in the form of the house prices index, which according to the S&P/Case-Shiller rose at a non-seasonally-adjusted 6.8% year on year during March, beating preliminary estimates. 

Euro – European Markets

Any new economic data coming out of the Eurozone this week shows very little long-term support for the Euro, as markets continue to focus on political developments in Italy. The EU’s third largest economy yesterday suffered its biggest market sell-off in years, as investors now look to the election which might now take place as early as July. New polls are likely to deliver an even stronger mandate for the anti-establishment, Eurosceptic Liga/5 Star Movement, casting uncertainty on Italy’s future within the European Union. 

The Italian bond markets benchmark 10-year contract declined by over 8 points on Tuesday, while yields on Italy’s two-year bonds, the most sensitive to political upsets, suffered their biggest one-day jump in 25 years. Intensifying the situation in Italy triggered fears of wider Eurozone instability, which undermined the Euro further. Markets lowered their expectation for a potential ECB interest rate hike to 30%, contributing to currency sell off as it declined to 10-month lows against the US Dollar. A currency strategist from Saxo Bank, John Hardy, said European Central Bank President Mario Draghi may soon be required to intervene to calm markets, just like he did during the Eurozone debt crisis in 2012. 

The Euro did recover slightly from its worst levels with gains to near 1.1601 against USD in early Europe trading on Wednesday. With German CPI data headlining the economic calendar today, a positive boost for the Euro is very much anticipated. 

What’s coming up? 

UK: Today we will see the GfK Consumer Confidence data released. The GfK Group Consumer Confidence is a leading index that measures the level of consumer confidence in economic activity. A high level of consumer confidence stimulates economic expansion while a low-level drives to an economic downturn.

US: The US ADP report and another revision of Q1 GDP are due out today, seconded by inflation figures measured by the PCE on Thursday. The ISM Manufacturing and May’s Non-farm Payrolls will be released on Friday.

EU: Markets will be looking at the G7 meeting tomorrow, where the global economic policy will be discussed. The G7 meeting is the meeting of the finance ministers from the group of seven industrialized nations that are the United States, Japan, Germany, France, United Kingdom, Italy and Canada. Traders will be paying close attention to this event as it might bring a new dimension to the markets.