The US Dollar Continues to Capitalize on Risk Aversion
What’s been happening?
Pound Sterling – UK Markets
Similar to Tuesday’s market action, the British pound weakened vs the dollar and stayed virtually unchanged against the euro on Wednesday in the absence of significant macroeconomic data releases from the UK. Meanwhile, investors stayed focused on remarks from candidates contending for Prime Minister Theresa May’s job.
During an interview with BBC Radio, “What it would be is an added level of uncertainty and difficulty at a time when we could well do without that. But we absolutely can deliver a Brexit with no deal,” said James Cleverly. Echoing the same sentiment, British Health Minister Matt Hancock argued that “no deal” was not a policy choice available to the next prime minister. “I think the Speaker would facilitate a majority in the House of Commons who are opposed to no deal in exactly the same way as he did in the run-up to the 29 March,” Hancock told the Financial Times.
US Dollar – US Markets
The US Dollar Index, which tracks the dollar’s value against a basket of six major currencies, extended its rally on Wednesday and closed the day higher against both the shared currency and the pound sterling. The only data from the U.S. on Wednesday showed that the business activity in the manufacturing sector in the Richmond area expanded at a stronger pace than it did in April with the Richmond Fed’s Manufacturing Index rising to 5 from 3.
The day’s headlines surrounding the U.S.-China trade conflict hinted at further escalation down the road. Several Chinese news outlets on Wednesday reported that China was considering to cut its rare earth exports to the U.S. as its next move in the trade dispute. In response to this development, a Pentagon spokesperson said that they have prepared a report explaining how they could reduce reliance on China with regards to rare earth minerals and submitted it to Congress. Adding to fears, Chinese technology giant Huawei announced that it filed a lawsuit against the U.S. government to fight sanctions from the Trump administration.
Concerns over the potential negative impact of a prolonged trade war between the U.S. and China on the global economy continued to weigh on the risk sentiment and forced investors to flee to safer assets. Reflecting the dismal market mood, the 10-year US Treasury Bond yield slumped to its lowest level since September 2017 while major equity indexes suffered heavy losses.
Euro – European Markets
The data published by Destatis on Wednesday showed that the unemployment rate in Germany ticked up to 5% to miss the market expectation of 4.9%. On the other hand, both the Business and Consumer Confidence Indexes in Italy rose more than expected in May. Nevertheless, the shared currency largely ignored the data.
Commenting on the policy outlook, European Central Bank Governing Council member Olli Rehn said the first rate hike was further away than they forecasted a few months ago explaining the bank was still trying to figure out if the soft patch was temporary or not."Reinvestment of maturing bonds will continue beyond first rate hike," Rehn added.
Later in the day, citing a letter written by Sigal Mandelker, the U.S. Treasury Department’s undersecretary for terrorism and financial intelligence, Bloomberg News reported that Washington will ban Instex, a European organisation formed by Germany, France, and the UK to bypass the U.S. sanctions in order to continue to trade with Iran, from the U.S. financial system if it were to go into effect.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday. David Ramsden, the Bank of England’s Deputy Governor for Markets and Banking, is scheduled to deliver a speech.
US: Weekly jobless claims, goods trade balance, and pending home sales data will be published on Thursday. More importantly, the U.S. Bureau of Economic Analysis will release its second estimate of the first quarter GDP growth.
EU: Retail sales and inflation data from Spain will be featured in the European economic docket.