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Fundamentals re-emerge as currency drivers

The lack of any political or monetary policy drivers yesterday forced traders to use old fashioned methods to make money! The simple good data buy, bad data sell ethos which has always driven trader’s mentality was prevalent.

With no Brexit activity to cloud judgements, the market concentrated on fundamentals.

The pound fell below the psychologically important 1.2500 level but found support at 1.2460 against a dollar which was itself under a bit of pressure.

The catalyst for this minor intraday weakness was a weaker than expected purchasing managers’ report of manufacturing activity. Against an expectation of the data being unchanged from February, activity fell to 54.2 from 54.6. This report is one of a series (including producer prices) which gives an indicator of future inflation.

Any lack of inflationary pressure will lead traders into a belief that any change of interest rate policy is some way away.

Against the Euro, the pound also lost ground. The single currency closed 0.5% higher at 0.8544.

Yesterday’s data releases in the Eurozone were universally supportive for the currency.

Eurozone wide unemployment remained steady at 9.5%, 0.1% lower than in February. Manufacturing data was also unchanged at 56.2. Producer prices increases by a chunky 4.5% following March’s 3.9% and above analysts’ estimates of a 4.4% rise.

Following last week’s relatively benign inflation data, the rise in producer prices indicates that there is some inflationary pressure to come for the Eurozone. This will exercise the ECB who have been dovish recently in its monetary policy pronouncements.

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Sabre rattling dominates international diplomacy

The U.S. and U.K. Governments both “talked the talk” yesterday but it remains to be seen if they can “walk the walk”. Any perceived lack of support of China over North Korea is no hindrance to President Trump. The president was in gung-ho mood that without Chinese support, the U.S. can deal with the issue alone.

In a similarly belligerent statement, the U.K. Government, backed by a “remember the Falklands” attitude from ex-ministers, said the fate of Gibraltar is not a bargaining chip at Brexit negotiations. The Spanish Government, perhaps a little rattled by such a forthright outburst, simply reiterated their claim over the “rock”.

President Trump’s visit to China will dominate news later in the week. In the light of the terrorist attack in St. Petersburg yesterday, risk aversion has returned to most asset markets.

The dollar reacted in “time-honoured” fashion falling by 0.9% before recovering slightly to close at 110.90. The fall has continued overnight reaching a low of 110.37.

The Bank of Japan’s “Tankan” report predicted the dollar to trade at an average of 108.50 in the next year. The Tankan is an in depth quarterly report from the Central Bank. It looks at all aspects of industrial, manufacturing and retail activity to pronounce on economic conditions for the next financial year.

Australia leaves rates unchanged

Despite recent improvements in the domestic economy to add to record trade data, the RBA left rates unchanged overnight.

The Governor recently indicated that rates had reached a bottom at 1.5%. The Central Bank is adopting a cautious approach towards an economy which it still considers to be fragile.