Euro Weekly 25 May 2018
It was a busy week for the pound. Public sector borrowing in Britain was less than forecast for April while the CBI’s Industrial Trends Survey showed an unexpected slowing in factory orders. The CBI Distributive Trades Survey indicated better-than-expected UK retail sales in May The headline rate of UK consumer price index inflation came in at 2.4%, a tick below forecast and down by the same amount on the month. A month ago it was a below-par UK inflation figure that played a key role in sterling’s recent decline but this month investors were more circumspect. Sterling did move lower on the news but by early afternoon it was on the road to recovery. In a statement to parliament this week, Bank of England Governor Mark Carney told the committee that “real household incomes are about £900 per household lower than we forecast in May of 2016, which is a lot of money”. Any notion of a rate forecast from the bank was dismissed. In essence, the Monetary Policy Committee feared becoming hostage to fortune. The pound also struggled against political tailwinds this week. GBP fell as worries mount that a new independence referendum for Scotland is on the cards. The pound struggled against the US dollar, due not only to the strength of the greenback but also because of a range of factors causing uncertainty. Key Brexit talks took place, the Italian coalition drama continues to unfold and weigh on the euro and there have been rumours of another UK election this year due to splits within the Conservative party.
The populist Italian government has got market trader tongues wagging, with Italian bond yields and credit default swap spreads rising since the election in early spring. The Euro struggled against all other major currencies last week in the wake of Italy’s borrowing costs jumping and stocks sliding. The coalition government has recently revealed plans to ask the European Central Bank to forget 250 billion euros of debt. The coalition government has both the euro and the single market rules in its sights. In addition, the coalition’s plan to increase public spending whilst cutting taxes is causing concern, particularly given the fact that Italy already has the second-largest public debt burden in the Eurozone, second only to Greece. Wednesday’s preliminary purchasing managers’ index readings from the €Z were all below forecast and contributed to the picture of slowing growth.
The dollar is going from strength to strength in anticipation of the US Federal Reserve lifting interest rates possibly as soon as September. It is unusual but not unprecedented for the oil and the dollar to move in tandem together. The US threat to impose hundreds of billions of dollars’ worth of tariffs on Chinese imports is continuing to cause ripples in the current market. The move from the US prompted retaliation from Beijing, which last month announced its own tariffs on key US products including soya beans, aeroplanes and cars. The provisional PMIs from the States looked alright; all were higher on the month and above forecast. But the minutes of the Federal Open Market Committee were not as gung-ho as investors had expected. Maybe the Fed is less keen on aggressive tightening than everybody had thought. It was not that the minutes were dovish overall; more rate increases are still on the cards in the near term. But the implication was that, further out, the tightening resolve is less clear-cut. With so much uncertainty within the political sphere, with the trade talks with China and Nafta still up in the air and the North Korea talks dramatically cancelled on top of the many domestic political issues, it is no surprise that the Fed is avoiding any clear predictions.
Comments from President Trump’s economic adviser Larry Kudlow earlier that Nafta was “still cooking” gave a hand to the Canadian dollar this week. The expectation is that a deal in principle could be reached this month, and both the certainty and any positive negotiations could aid the Loonie further.
The influence of the US could also be felt down under. In an interview with Fox News, US Treasury Secretary Steven Mnuchin inadvertently gave a boost to the currencies down under after saying that the plans for protectionist trade tariffs are currently on hold, and that China has agreed to the same approach. Close trade ties between China and Australia meant that the Aussie dollar benefited from the news, and in a less-significant but still positive way, also helped the New Zealand dollar.
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