Risk Aversion Weighs on European Currencies
What’s been happening?
Pound Sterling – UK Markets
The British pound weakened against both the dollar and the euro on Monday as the lack of developments suggesting that the government and the Labour party is moving closer toward a deal weighed on the currency.
Citing a UK Cabinet source, Sky News political editor on Tuesday said that it was likely for the opposition Labour party to do “some kind of a deal” with the government. Earlier in the day, British foreign secretary Jeremy Hunt told reporters that both sides needed to compromise to reach an agreement and added that he wasn’t in favour of a customs union as a long-term Brexit outcome. Meanwhile, Cabinet Office minister David Lidington announced that the UK will be holding European Parliament elections on May 23 and said that July 2 was the government’s new deadline for passing the Brexit deal. “We very much hoped that we would be able to get our exit sorted and have the treaty concluded so that those elections did not have to take place. But legally, they do have to take place - unless our withdrawal has been given legal effect - so those will now go ahead.” Lidington said.
US Dollar – US Markets
The greenback continued to find demand as a safer alternative on Tuesday with investors moving away from risky assets amid concerns over the U.S. and China staying in a prolonged trade war if they fail to reach an agreement and President Trump bumps up the tariff rate on Chinese imports to 25%. Pressured by the dismal market mood, Wall Street suffered heavy losses and the 10-year Treasury bond yield fell more than 2%.
In the meantime, the Investors Business Daily’s IBD/TIPP Economic Optimism Index rose to its highest level in more than 15 years at 58.6 and beat the market expectation of 54.5 to provide an additional boost to the US Dollar Index. “The six-month outlook gauge for the economy vaulted 7 points to 55.8, after falling into a pessimistic territory for four of the prior five months,” the IBD said in its press release and touched on the trade dispute with China: “The IBD/TIPP Poll reflects 900 responses from April 26 to May 5. On the last day of polling, Trump blew up expectations that a China trade deal was a sure thing with a couple of tweets.”
Euro – European Markets
The shared currency closed the day modestly lower against the dollar while posting small gains vs the pound sterling. In its Spring 2019 Economic Forecast, the European Commission announced that it lowered the growth forecast for the euro area in 2019 to 1.2% from 1.4% in February’s publication. Valdis Dombrovskis, Vice-President for the Euro and Social Dialogue, noted that risks to the outlook remain pronounced in the eurozone. “On the external side, these include further escalation of trade conflicts and weakness in emerging markets, in particular, China. In Europe, we should stay alert to a possible ‘no-deal Brexit', political uncertainty and a possible return of the sovereign-bank loop,” Dombrovskis explained.
Regarding the inflation outlook, the EC noted that inflation was expected to drop to 1.6% this year before rebounding slightly to 1.7% in 2020.
Earlier in the day, Germany’s Destatis reported that factory orders increased by 0.6% in March following February’s 4% drop and still fell short of analysts’ estimate of +1.5%.
What’s coming up?
UK: The only data release from the UK on Wednesday will be the Halifax House Price Index. Bank of England Deputy Governor for Markets and Banking, Dave Ramsden, will be delivering a speech as well.
US: Federal Reserve governor Lael Brainard will be speaking at an event on Wednesday. The weekly MBA mortgage applications will be featured in the U.S. economic docket.
EU: Industrial production data from Germany, which is expected to show a contraction of 0.5% on a monthly basis in March, will be published.