Daily Market Brief 1 June 2018

All Change as Euro Holds Gains

July 1st: Highlights

  • Positive data and political stability drive euro higher
  • Sterling awaits Brexit proposals
  • Dollar soft as trade war looms

Euro finds a base to show weekly gain

When the euro was almost in freefall recently, there appeared to be very little that could be done to reverse the fall and allow the single currency to stabilize.

Political issues in Spain and Italy were set to rumble on, heralding a period of political uncertainty across the region, an economic slowdown was on the cards as indexes of manufacturing activity showed signs of weakness and the ECB remained stoically opposed to any change in monetary policy.

Today the picture looks far brighter. In Spain the opposition has garnered sufficient votes to oust Prime Minister Mariano Rajoy and a vacuum has been averted as a new Prime Minister, Pedro Sanchez looks set to be appointed. Rajoy has refused to resign which means today’s vote will see him become the first Spanish Prime Minister to lose a vote of confidence. In Italy while the coalition is still going to be Eurosceptic, the threat of fresh elections has been averted as agreement has been reached on the new Finance and Economy Minister.

Eurozone-wide inflation rose to 1.9% year on year raising hopes that the ECB may awaken and consider raising rates if the trend continues. Eurozone data is not prone to anomalies as we see in the U.S., so it is unlikely that this rise will be reversed. The rate of inflation was far higher than the market expected and helped the single currency reach a day’s high of 1.1725 although it slipped back slightly to close at 1.1692.

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Sterling steadies against weaker dollar

The pound managed to rally a little versus the dollar yesterday although it eventually ended the day virtually unchanged. Volatility in FX markets has increased to such an extent that ranges have increased but it is the abrupt “voltes-face” that have traders struggling.

Following a period of almost unstoppable Sterling strength as the Bank of England threatened to hike rates and optimism grew about a soft Brexit, the fall in the pound was just as dramatic, possibly more so, as the period of Sterling weakness was exacerbated by dollar strength which magnified the pace and speed of Sterling’s fall. We now appear to have entered a period of uncertainty where traders are concerned about opening fresh positions as they have been whipsawed by sudden reversals as new factors emerge and existing drivers fade.

The pound has now entered something of a lull as the market awaits the release of the UK’s proposals for the relationship with the EU following Brexit. The major question will be the proposals for the Irish border on which so much could hang.

The pound reached 1.3349 yesterday before falling back to close at 1.3297 and it has lost further ground overnight reaching (0630 BST) 1.3257.

Dollar lower as Trump begins trade tariffs

The threat of a trade war over steel imports returned yesterday as the U.S. commenced levying tariffs on imports from the EU, Canada and Mexico. President Trump railed against several “unfair” trade deals enacted by his predecessor as far back as when he first started campaigning.

The present situation comes at the end of a two-month exemption given when the measures were first announced. The three affected countries have each criticized the levying of tariffs with Mexico and Canada announced retaliatory actions while the EU trade Minister said it had reprisals “ready to go”

The dollar index fell yesterday to a low of 93.71 but has rallied a little overnight trading back to 94.20

Today’s release of the employment report for May will contain several estimates and will be subject to considerable revision next month but the more reliable data for wage growth will set the short-term tone for the greenback.

Analysts expect wages to have risen at a rate of 2.7% in May, up from 2.6% in April. It is thought that the FOMC may want to see that number closer to 3% before acting again to raise rates.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”