What’s been happening?

Pound Sterling – UK Markets 

Political factors continued to have an impact on Friday and had weighed negatively on Sterling as Brexit speculations continued. EU Chief Negotiator, Michel Barnier, expressed that the latest UK backstop proposal raised more questions than answers and that negotiations are nowhere near finished over the post-Brexit customs deal. Fears about a lack of progress were only reinforced when it was said that the UK government would not be releasing the Brexit White Paper ahead of the late-June EU summit.  

Sterling lost ground this morning after the Office for National Statistics data showed UK manufacturing production contracting for the second consecutive month in April and the UK’s goods trade balance widening much faster than expected. Output from the UK manufacturing sector fell by -1.4% during April, when economists had been looking for a 0.3% increase. Meanwhile the struggling construction sector saw output rise by 0.5%, which is higher when compared to the -2.3% fall seen in March, however is still disappointing as economists had looked for a much larger 2.4% increase. Sterling fell by around 0.35% against other major currencies upon the data, trading at 1.3366 against the USD and 1.1341 against the EUR.

US Dollar – US Markets

Markets have been looking ahead to the Federal Reserve and the ECB meetings taking place later this week, a relatively hawkish tone is expected from both banks, which has limited the scope for currency moves between the pair in recent days. On a weekly basis, the US currency registered the sharpest decline since late March, indicating that the momentum for a firmer US Dollar could be slowly fading. 

Last week, major stock averages all rose at least 1.2%, but those gains were capped by trade tensions between the US and key trade partners as the G7 summit kicked off on Friday. Despite the fact that the president's advisors have identified China as the villain, Trump's tariffs disproportionately hit America's G7 allies, which resulted in the summit becoming more of a G6 tribunal with America in the dock. Euro members insist that retaliation against the “unfair trade tariffs” can be expected. 

Euro – European Markets

The Euro was trading lower in Europe on Friday following release of weaker than expected German industrial output and exports data for the month of April, adding to signs that Europe’s largest economy started the second quarter on a weak footing. Data from the Economy Ministry showed industrial output fell by 1.0%, while separate data from the Federal Statistics Office showed exports fell by 0.3%, while imports rose by 2.2%. 

Markets are staying cautious ahead of the Federal Reserve and the European Central Bank policy meetings this week. A remark from chief economist Peter Praet that the ECB will debate whether to end asset purchases later this year has given some indication that a shift in policy may be coming sooner than anticipated. However, a drubbing in Italy’s bond market and weaker economic data is raising doubts whether Praet’s remark may be raising falsely optimistic hopes. 

Italy’s newly appointed economy minister, Giovanni Tria, stated yesterday that the government’s position on the Euro is clear and unanimous and that there is no question of leaving the single currency, which provided some Euro support as it advanced to the 1.800 area against the US Dollar this morning as Italian bonds opened sharply higher.    

What’s coming up? 

UK: The UK is preparing for a data heavy week. Tomorrow we will see the average earnings and unemployment data for the month of April released, which will be followed by consumer price index and retails sales figures out the following days.  

US: US markets are also facing a data heavy week. Consumer price index will be out tomorrow afternoon followed by the highly anticipated Federal Reserve policy meeting and Fed’s Powell speech on Wednesday. 

EU: Euro markets will be looking at the ZEW survey on the economic situation out tomorrow, followed by industrial production figures out on Wednesday. The European Central Bank meeting will be of most importance for the Euro markets, as well as the key Euro currency pairs.