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May

Your midweek roundup: global political pressures driving currency markets

Published: Tuesday 29 May 2018

  • Sterling seeks solace in retail sales
  • Brexit still dominates the day
  • Disappointing days for the Euro
  • Political pressures take their toll
Sterling seeks solace in retail sales

The Pound ended last week with a boost from better than expected UK Retail Sales data, coming out at a year-long high of 1.6%, well above the forecast of 0.8% for April. This is despite the ongoing uncertainty around the UK High Street. However, activity elsewhere in the currency markets brought Sterling lower again as the day went on.

UK employment and wage growth data were also in the spotlight, with record lows in unemployment throughout the UK, but total wage came in just below forecasts. This news did help stabilise Sterling in a difficult and busy week for the British currency. Inflation fell to a year-long low, which did not help the Pound.

Sterling then surged temporarily on news of agreement on a customs union, but when the reports were denied, fell back down again. While the Pound was enjoying a position of strength against the Euro in light of disappointing Eurozone economic data, the Pound was down against all the other major currencies, particularly the US, Canadian and Australasia Dollars.

Brexit still dominates the day

The all-important retail sales reporting was followed by a speech from Bank of England Governor, Mark Carney, emphasising the economic issues the UK is facing and blaming Brexit. However, he did share the view of many market analysts when he said he believes the Pound will push back up again when an agreement is reached on Brexit. Sterling had already slipped on continuing Brexit speculation and as Carney testified to the Treasury Select Committee on inflation.

There was some positive impact of Brexit discussions on the markets, however, as the Pound received a boost from reports that UK Prime Minister, Theresa May, was calling for a second transitional period to run until 2023. Because the intention is to support existing customs rules to lessen the impact on trade, it was seen as a positive move forward by the markets and helped Sterling to strengthen.

Brexit continues to drive the news agenda and an ongoing impact on currency markets. After all the Brexit-based activity of last week, this week began with George Soros speaking out against the "immensely damaging process" of Brexit and the state of the EU, warning the EU of the imminent anti-Brexit “Best for Britain” campaign manifesto.

Disappointing days for the Euro

The Euro has also been having a tough time of it recently. German data has been disappointing, and its position as a key Eurozone economy means that this has dealt a blow to the Euro .Add to that further sub-par data from France and in the Eurozone industrial production figures, and it paints a poor picture for Eurozone economic performance, serving to weaken the Euro further against its key currency counterparts.

Political pressures take their toll

Even more than the economic disappointments, political matters have been deeply felt in the EU. The Italian political situation has not only weakened the Euro, but has sent ripples across the markets, sending investors to the safe haven currencies, such as the US Dollar.

Global politics are also affecting currency markets, led by US-North Korean and US-Chinese tensions. Trade tariffs on imports from China and setbacks in negotiations between US president Trump and North Korean leader Kim Jong Un are leaving markets uncertain and trade talks tentative. First, the summit between the two nations was called off, now it appears to be back on again. This did knock the US Dollar off its pedestal initially, sending investors towards the Japanese Yen instead, but with other economic and political uncertainty rife, the US Dollar remains in a strong position.

Contradictory economic results for the US stopped the US Dollar from strengthening even more last week, as interest rates were not raised again at the latest meeting of the Federal Reserve, and fears of trade wars continued to dampen market spirits.
 
The Canadian Dollar, which has been benefitting from US Dollar strength and rising raw materials costs in recent weeks, also fell as a result, given Canada’s close export relationship with the US and ongoing trade tariff concerns. Canada’s economy seems to be on a far surer footing in recent months, with improving inflation and retail sales. However, while negotiations are still on the cards for the North American Free Trade Agreement (NAFTA), the atmosphere is tense and still uncertain, making the markets jumpy.

Déjà vu?
 
Euro notes

We’ve been experiencing some extreme weather here in the UK, with flash floods, thunder and spectacular lightning storms. All mixed in with temperatures up to 30 degrees one minute and icy winds the next. Like the currency markets, it’s all rather unpredictable and full of ups and downs…

A glance at the news from this time last year shows a very similar situation. Ah, the glorious British summer! We all like to have a good moan or a laugh about it, though…

On a more serious note, we hope people affected by the flooding stay safe – scary stuff.

#WednesdayWisdom

“In the spring, I have counted 136 different kinds of weather inside of 24 hours.”  - Mark Twain

“Four seasons in one day…” - Crowded House

“Sunshine is delicious, rain is refreshing, wind braces us up, snow is exhilarating; there is really no such thing as bad weather, only different kinds of good weather.” - John Ruskin
 
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