Euro unable to escape negative factors
May 21st: Highlights
- Single currency facing further losses
- Sterling supported by inflation expectations
- Google/Huawei issue ramps up trade concerns
Euro struggling for a foothold
This week’s elections to the European Parliament are another source of concern as the fears over a rise in nationalism continue to grow. It is more than a little ironic that parties that believe in putting their own countries first like Marine Le Pen’s National Rally in France and Matteo Salvini’s Northern League In Italy are able to hold a rally to galvanize nationalist parties across the entire region while the more liberal parties who support a more closely integrated EU continue to struggle to garner support.
There is a genuine feeling across the region in general, and in the financial markets in particular, that these are the most important Parliamentary elections that have been held since the political amalgamation took place. Having come this far, the EU must continue to evolve in order to survive. However, this week’s elections will provide definitive evidence about whether the people of Europe agree.
The second major issue facing the region is whether the slowdown that is currently being experienced is due to the integration of monetary policy and the rigid policies set in place to ensure adherence to the growth and stability pact.
It was wholly expected that the “higher inflation” economies like Italy and Spain, which suffered badly from the explosion in lending created by lower interest rates, would find “one size fits all” an issue but with France and Germany suffering, the entire premise is likely to face a tough examination if the current downturn continues through the next two quarters without positive signs of sustainable growth.
The single currency traded in a narrow range yesterday as the market took stock of its recent fall. It traded between 1.1176 and 1.1150, closing at 1.1167, just seven points above its opening level.
Sterling supported by rate concerns
The Bank of England, which has been sidelined as the Brexit drama has played out, remains cautious about rate hikes in the current environment. The BoE fears that higher borrowing costs for businesses already concerned over a no deal Brexit could lead to a slowdown which the economy has so far done well to avoid.
The expectation is that the CPI will tick back up above the Government’s 2% threshold although it will need to be on a confirmed upwards path for the Bank of England to consider a hike.
As with every issue facing the UK, whether political or financial, the outcome of Brexit is the key.
It is difficult to imagine the departure of the Prime Minister being the solution that is being sought ever more frantically. It is possible that a new leader for the conservatives may galvanize the process but a solution to the current stalemate solely due to a new leader is unlikely.
Following its fall last week, the pound managed to at least stabilize yesterday as it clung to support around 1.2720 versus the dollar. It reached a high of 1.2759 but closed a little lower on the day at 1.2725 having opened at 1.2737.
Huawei/Google: Trade or Security?
Overnight it was reported that the ban has been suspended, temporarily, until the 19th of August to allow for further discussion.
Yesterday the question had been raised as to whether this was a genuine security concern or another ploy to increase the pressure on China to reach an agreement over trade with the U.S. That question has pretty much been answered as it would be unique for a ban created by a security concern to be able to be temporarily suspended.
The ban that included Huawei was issued for 68 firms who now cannot buy American products without the explicit approval of the U.S. Government. The ban, should it be confirmed in August, could backfire on the U.S. since there are several significant businesses involved in supplying chipsets and other components for smartphones to the Chinese giant.
It is likely that this is just another ploy by the Trump Administration to hobble a firm from what is seen as a competitor for global dominance in trade and several other areas.
The dollar reacted to the lowering of risk appetite by continuing its recent strength. It reached a high of 98.04, before settling back to close at 97.95.
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.”