What’s been happening?

Pound Sterling – UK Markets 

Sterling erased the losses caused by yesterday’s release of disappointing UK industrial production data and rose this morning following the release of the UK’s unemployment rate data, which was recorded the lowest level since 1975. The latest labour market report this morning showed the UK economy continuing to create new jobs at a rapid rate in April. UK unemployment remained at 4.2% in the three months to the end of April, its joint lowest level since 1975, furthermore the number of welfare claimants posted a surprise 7,700 fall. Average earnings rose by 2.5% during the period, in line with economists’ expectations. The Pound was quoted 0.25% higher at 1.3404 against the US Dollar following the release this morning, while the Pound to Euro rate converted a previous 0.10% loss into a 0.04% gain and traded at 1.1361. 

The Pound, however, may be tested today as MPs gather in the House of Commons to vote on series of Brexit amendments added to the EU Withdrawal Bill by the House of Lords, which will set the government’s Brexit strategy in legislative stone. Reports suggest that PM May is likely to lose the votes, which will by law require the UK to remain a member of the EU single market and customs union until another deal is presented. Such outcome would reduce the prospect of a so called hard-Brexit and boost the Pound rate in the short term. 

US Dollar – US Markets

US Dollar dipped Monday on rising fears over a so-called trade war, after President Trump told his aids not to sign the G7 communique, a statement of intent made at the end of every meeting and usually signed by all participants. A tirade of tweets by President Trump addressing a trade deficit with Canada and the European Union were a good indicator that he is not planning to remove the tariffs any time soon. Although the risk of a global trade war is still very much alive, the global FX price action this week will be driven by the stream of key event risks such as the US/North Korea summit, FOMC meeting and the ECB meeting. 

US inflation expectations were flat in May after several months of gains, while Americans grew more pessimistic about income and spending growth, according to a Federal Reserve Bank of New York consumer expectations survey published yesterday. The survey remained at a median of 2.98% for one year into the future, while real time inflation gauges have edged higher toward a 2% Fed target, indicating that another interest rate rise is expected on Wednesday during the FOMC meeting.  

Euro – European Markets

Following Italian Finance Minister Tria’s commitment to staying in the single currency, there was also reassurance from the newly appointed head of Italy’s markets authority, Mario Nova, who said that he had no doubt that the savings of Italian citizens would remain denominated in Euros. Italy’s borrowing costs fell sharply yesterday, its two-year bond yield tumbled 50 basis points to 1.16%, while ten-year bond yields were down 25 basis points at 2.88%. 

The yield on Germany’s benchmark 10-year bond in the meantime was up 3 basis points at 0.48%, as fears of a global trade war weighed on broader financial markets after US President Trump withdrew out of the joint G7 communique over the weekend. German Chancellor Angela Merkel said that Europe will implement counter measures against US tariffs on steel and aluminium, adding to fears of a trade war. Eurozone markets are however placing most of their focus on the ECB meeting taking place on Thursday. The bank is currently in a blackout period; therefore, no guidance can be provided for the markets, which creates uncertainty limiting Euro moves until the meeting. 

What’s coming up? 

UK: The UK, along with the rest of the EU and US is experiencing a data heavy week. Tomorrow we will see the release of core consumer price index data, followed by year on year and month on month retails sales figures out Thursday.

US: Consumer price index will be out later this afternoon followed by the highly anticipated Federal Reserve policy meeting and Fed’s Powell speech tomorrow, where a decision on the interest rate will be announced. 

EU: Euro markets will be looking at the industrial production figures out tomorrow. The European Central Bank meeting will be of most importance for the Euro markets, as well as the key Euro currency pairs.