Pound recovers against the Euro as markets focus on bond yields
What’s been happening?
Pound Sterling – UK Markets
This morning saw the pound to euro exchange rate hit a May’s high, as the UK outperformed in the global yields market. The current market dynamic seems to be favouring the currencies that command a higher yield on their sovereign debt. UK ten-year yields are yielding at 1.5%, while Germany bund 10-year yields at 0.62%, allowing the pound to climb higher against the euro. The US 10-year rate remains dominant at 3.06%, and its advance has proved particularly damaging to the EUR/USD exchange rate, with losses by the Euro impacting other Euro-based exchange rates, EUR/GBP included. At present, he UK ten-year yield appears to be in an uptrend, which could well continue to support the pound against the laggard euro.
Britain has announced that it will be seeking £30 billion investment to boost its economy after Brexit. Trade secretary Liam Fox will be meeting overseas investors today to submit bids for financing £30bln worth of projects to help the UK cope with the upheaval of leaving the European Union. Britain will be aiming to reinvent itself as powerful, global trading nation and invest more time improving ties with countries outside Europe as the government prepares to leave the EU next year.
Investors attending will have the chance to fund 68 projects across 20 different sectors of the economy, such as technology, housing and retail. These projects will be scattered across the country, with many based in less affluent parts of Britain. “This is a bold and ambitious programme, building on the UK’s position as the leading destination for foreign investment in Europe,” Fox said in a statement.
US Dollar – US Markets
Ten-year US government Treasury yields, which are a key driver of global borrowing costs, approached a 7 year high of 3.12% today, as higher oil prices pointed to higher inflation and followed yesterday’s buoyant US retail sales numbers. Oil prices neared the $80 a barrel threshold for the first time since late 2014, putting the US dollar in a very strong position.
US President Donald Trump acknowledged yesterday that it was unclear if his summit with North Korea, planned for 12th June, would still be going ahead. The news came in after Pyongyang threatened to pull out of the unprecedented meeting, a move that could deny him a potentially major foreign policy achievement. North Korea said that it might not attend if Washington continues to demand it unilaterally abandon its nuclear weapons. North Korean leader Kim Jong Un has already called off talks with South Korea, which were scheduled for Wednesday, attributing the decision to US – South Korea military exercises.
Euro – European Markets
Italy’s 5 Star Movement and The League coalition shook Europe yesterday with the release of their draft plans. The coalition has insisted that the deal is only a draft and has since been changed, however the fact that some of the proposals contained had even been considered has worried Europhiles. According to the draft, a League/5 Star government would like to introduce an opt out mechanism to leave the eurozone if certified by a referendum. The document also calls for a rewriting of EU treaties and changes to fiscal policies, like the Stability and Growth pact, which restricts countries’ borrowing and spending. Brussels is closely watching the situation in Italy as it evolves.
The European Union has been looking at options for tackling US sanctions that may be imposed on EU companies doing business with Iran. If Donald Trump was to make his threat an official sanction, it could very well jeopardise more than 20 billion euros of annual trade, and big contracts for European companies. Most importantly, the US are putting at risk the economic benefits to Tehran that are keeping the nuclear deal, which the US has recently abandoned, alive. The EU have a couple of options, the bloc could complain to the World Trade Organisation (WTO), however these disputes normally take quite a while. The EU could also decide to pay for Iranian oil in euros instead of dollars. Several Iranian officials have expressed that the latter option would be acceptable, saying that, - “as long as Iran gets its money the deal would remain alive.”
What’s coming up?
UK: No major data coming out of the UK this week, markets will continue to focus on UK’s bond yields uptrend and how that will continue to affect the GBP/EUR exchange rate.
US: The US FX calendar looks pretty quiet too this week, continuing jobless claims and initial jobless claims figures will be coming out later this afternoon. Markets will be following US crude oil price shifts.
EU: The Eurozone is currently paying a very close attention to the Italian coalition development and the release of their final government plan report.