Daily Market Brief 31 May 2018

Euro rallies as Italy vote fears recede

May 31st: Highlights

  • President to allow coalition more time to form Government
  • Sterling remains pressured by economic slowdown and Brexit fears
  • Dollar index starts correction as positivity fades

Concern over early elections averted

The Italian President, Sergio Mattarella, fearing the outcome of fresh elections, has allowed the two major members of the coalition, formed in the wake of elections held in March, more time to form a Government. This will avert market concerns over a more radical, anti-establishment winner should the population be asked to vote again.

There is clear anti-EU feeling in the country which hasn’t seen the benefits of euro membership as the country struggles with a potential banking crisis and living standards that continue to fall.

The euro staged a “relief rally” as the news of a potential solution was released. It is probable that the President and the leaders of Five Star and League have held talks in which a compromise Finance Minister has been agreed after the President refuse to endorse the previous candidate fearing his anti-euro views.

The single currency rallied by 1.1% reaching a high of 1.1676 and closing close to that level. Versus the pound, it reached 1.1385 but has fallen back a little overnight reaching 1.1409. The euro is almost unchanged from yesterday’s close in Asian trading this morning.

German inflation data, a prelude to today’s eurozone wide inflation report, was a little higher than traders had expected which also gave a boost to the euro. It is unlikely that today’s report will bring any pressure to bear on the ECB as price rises across the region remain benign.

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Sterling left behind by Euro rally

The pound continued to suffer yesterday as the multiple headwinds of economic data, monetary policy and Brexit combine to discourage traders from closing short positions.

With the Government due to release its proposals for the “future relationship” as soon as next week, the market is gearing up for the disappointment of a hard Brexit unless there is another complete capitulation as we saw over stage one of the negotiations.

Fears of a no-deal Brexit have grown as the Bank of England has seen fit to enter the debate.
Its concerns are not around the fabric of any deal but the aftermath which could see it ill-equipped to deal with potential stagflation where a falling pound brings inflation and growth turns negative

Versus the dollar, the pound reached a low of 1.3242 before correcting a little to close close to 1.3300. Overnight it has managed to claw its way back above 1.3300 reaching a high of 1.3312 although it still looks fragile and susceptible to negative news.

A period where the pound and single currency were moving in unison now appears to be over which will exacerbate the range for the GBP/EUR cross although it remains within a broad 1.1300/1.1550 band.

Dollar lacking impetus as drivers fade

The dollar, for now, appears to have taken over from the single currency as the market’s “makeweight”. It is a feature of the market that among G7 currencies there always seems to be a currency where both positive and negative drivers either cancel each other out or disappear entirely leaving the currency in a reactive mode.

The mantle was held by the euro until recently as the ECB’s benign attitude allowed the currency to find its own level. Now, with a potential economic slowdown and the Italian crisis, the euro stands front and centre as the gloss on the dollar also fades.

With tomorrow’s employment report to be followed by inflation data that hiatus may be short lived, as they will provide a near term view on the path for interest rates and confirm or otherwise a rate hike at June’s FOMC meeting which will be held on 12/13

The dollar index fell as the euro rallied reaching a low of 94.28 and has fallen a little further overnight reaching 93.93.

Yesterday’s report on private sector jobs which “traditionally” precedes the non-farm payroll report was a little weaker than had been expected. Although the correlation between the two reports is not as strong now as it was, it still provides a tenuous indicator of the direction of the employment market.

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.”