UK’s Backstop plan and ECB’s QE in market focus
What’s been happening?
Pound Sterling – UK Markets
Political factors dominated Sterling in European trading yesterday, as Brexit negotiations moved ahead with the first solid customs proposal being put forward, not one however that actually solves the customs issue. Prime Minister Theresa May unveiled a one-year backstop plan for the Irish border after Brexit yesterday, finding a compromise that has stopped her head Brexit negotiator Dave Davis from resigning following growing disagreements within the Brexit committee. However, there were also fears that the plan could have resulted in a weakening of the government position, furthermore according to some reports the EU Commission appeared unimpressed with the proposal. This uncertainty led to a slip in the Pound rate, with it trading at 1.3450 against the Dollar.
The deputy governor of the Bank of England, Dave Ramsden, said yesterday that the bank’s view that the economy’s first quarter slump was mainly due to the snow is supported by the economic data. The BoE blames the poor GDP growth of 0.1% in Q1 on the “Beast from the East” snow storms and expects growth to bounce back to 0.4% in Q2.
US Dollar – US Markets
The US weekly jobless claims decreased 1,000 to a seasonally adjusted 222,000 for the week ended 2nd June. This was below the 225,000 market expectation and pointed to a further tightening in labour market conditions. The robust labour market and firming inflation have cemented expectations the Federal Reserve will raise interest rates next week. Prices of US Treasuries held at lower levels after the data while the dollar pared losses against a basket of currencies yesterday.
There have been speculations that the US Dollar has hit its high and is now likely to move downwards. The Dollar has fallen steadily since the final days of May. The Dollar index was quoted 0.33% lower at 93.08 yesterday while major currency pairs like the EUR/USD and GBP/USD rates were all quoted higher.
Euro – European Markets
The Euro saw some fresh highs in early Europe trading yesterday amid further speculations that the European Central Bank could end the quantitative easing programme at next week’s monetary policy meeting. The Euro bounced to 3-week highs against the US Dollar with a peak of 1.1840 head of the New York open. EUR/USD losses following a sharp decline in German industrial Orders were short-lived, as markets now look to next week’s combo of the Fed on Wednesday and the ECB on Thursday, which will be of most critical importance to the directional movement in the pair.
Today marks a start of the two-day long G7 meeting between seven of the world’s strongest economies. French President Emmanuel Macron, who has made efforts to develop a friendly relationship with President Trump, said the other G7 nations - Britain, Canada, Germany, Italy and Japan, as well as France - should remain “polite” and productive but warned that “no leader is forever,” a sign that Europe would not surrender quietly to the US President and his newly introduced trade tariffs. The meeting could be of potential great use for the EU members to begin discussions with the US about the metal trade tariffs and ease growing fears of a trade war between the US and Eurozone.
What’s coming up?
UK: Markets will be closely following the Brexit developments and will be looking out for any insights into how the EU might respond to the “backstop plan” proposed by the UK.
US: No major data coming out of the US this weekend. The Baker Hughes US oil rig count will be out later this evening. The active rig count acts as a leading indicator of demand for products used in drilling, completing, producing and processing hydrocarbons.
EU: Markets will be looking at the G7 meeting taking place in Canada over a two-day period, starting today, during which the global economic policy will be discussed. The G7 meeting is the meeting of the finance ministers from the group of seven industrialized nations that are the United States, Japan, Germany, France, United Kingdom, Italy and Canada. Traders will be paying close attention to this event as it might bring a new dimension to the markets.