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June

A busy week for the currency markets focuses on geopolitical tensions

Published: Tuesday 05 June 2018

  • Euro ends the week and month on a high
  • Sterling suffers from policymaker and political rhetoric
  • US data surprises but fails to boost USD
  • All eyes on Federal Reserve
This week started off with a bang, as the currency markets went on a wild, rollercoaster ride on the ups and downs of geopolitics.

Euro ends the week and month on a high

The Euro ended last week on a high, as markets welcomed the news of a decision on the new Italian government and that Italy would not have to go to the vote again. This was seen as one less element of political risk to worry about. There is still the question of trade tariffs, however, with the UK Prime Minister. Theresa May, in talks with Donald Trump about the new tariffs imposed by the USA on steel and aluminium. They have committed to discussing this again at the G7 summit, so there may be hope of a resolution yet.

Sterling suffers from policymaker and political rhetoric

The British Pound, however, weakened on comments from the UK’s central bank, the Bank of England (BoE), which focused on risks to the UK economy. Markets were still uncertain after the disappointing Gross Domestic Product (GDP) figures and the interest rate hike that was expected for May not materialising in the face of disappointing overall economic growth, so Sterling has suffered.

This was despite a very positive turn for UK economic data. The UK Services Purchasing Managers' Index (PMI) came in at 54, a strong growth result, which exceeded market expectations. The UK Manufacturing PMI also brought good news at the end of the week and the end of the month of May, posting a result of 54.5, well above growth levels and a positive jump from the previous month’s figure of 53.9. Even the UK’s construction sector, which has struggled in recent months, saw the latest UK Construction PMI in above the all-important growth figure of 50, with a welcome 52.5.

US data surprises but fails to boost USD

The latest US jobs data was far better than anticipated and saw a surprise drop in unemployment from 3.9% to 3.8%, bringing unemployment to its lowest in the US for 18 years. The Non-Farm Payrolls data, considered an important benchmark and sign of US economic health, also smashed expectations of 189,000, coming in at 223,000. The US Dollar did not benefit from this economic boost, however, as global trade war fears – fuelled by Trump’s decision to let the current trade tariff exemptions for Mexico, Canada and the EU lapse and threats of tariffs on China – dampened the spirits of global markets. Rumours of international retaliation have done for the US Dollar.

This follows the US Beige Book, considered to be the key indicator of economic strength for the US economy, showed positive economic signs ahead and also healthy growth for the manufacturing sector, in particular.
 
Euro notes with coins

All eyes on Federal Reserve

Meanwhile, all eyes will be on the next meeting of the Federal Reserve, where they are expected to increase interest rates again, in light of impressive US employment growth and recent comments from American policymakers that all point to a more aggressive monetary policy stance in the coming months.

Canada keeps interest rates the same – not for long?

The Bank of Canada kept Canadian interest rates the same, but were a little more assertive in their accompanying speech, leading markets to consider that there will be a rate increase soon – potentially even next month – and there could be another on the horizon, before 2018 is out.

No interest rate hike Down under

The Australian Central Bank, the Reserve Bank of Australia (RBA) has kept interest rates the same once more – the Australian Dollar has not strengthened as much as it could, as this reflects a cautious stance from policymakers and expected gradual growth, which tends to weaken the home currency.

#TuesdayThoughts

“Don’t watch the clock; do what it does. Keep going.” – Sam Levenson, American humourist, writer, teacher and broadcaster.

“Educating the mind without educating the heart is no education at all.” Aristotle, Greek philosopher.

“If you don’t like someone’s story, write your own.” Chinua Achebe, Nigerian novelist, poet, professor, and critic.
 
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