Is it me or does it seem like there are very loud squawks from the hawks suggesting the world is heading towards war in the Middle East again? I’m sorry about the lack of humour this week but against all other advice and direction, including his own Secretary of Defence, Donal Trump announced his plans to withdraw from the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear agreement. Trump’s newly installed national security adviser, John Bolton, wrote an article a few years ago entitled “To Stop Iran’s Bomb, Bomb Iran”. By withdrawing from the nuclear agreement, and making clear their goal of escalation, Trump and his administration seem to be creating their own excuse for doing exactly that and make no mistake, this is going to have global repercussions.
The North Koreans have already expressed doubts on their own dealings with the US because of the “repugnance” they feel for Bolton. It is relevant to see what real effect the opening of the US embassy in Jerusalem will have. There are already heavy condemnations coming from the UN and the international community over the deaths of so many Palestinians and observers. Incredibly USD seems to be benefiting in relative value.
GBP/USD suffered further losses with no help from the Bank of England who left the rates unchanged and sent a cautious message. GBP/USD dropped below 1.3500 at one point on speculation that the BOE will stay where it is for some time to come. In the US, the dollar initially continued higher but eventually began retreating after inflation came out at 2.1% y/y against 2.2% expected. Has the dollar peaked? Nope!
The jobs report has been the primary event of the week (yesterday). UK wage numbers came out as expected: 2.6% on the headline (down from 2.8%) and 2.9% when excluding bonuses (up from 2.8%). The as-expected figures mean that real wages are finally up after inflation had eroded them for quite some time. However, this was expected. The GBP/USD dropped ahead of the publication and reached a trough at below 1.347. Yet as the numbers came out, the pair slightly recovered. In the medium term we anticipate GBP to regain recent losses as the markets price in an August rate hike by the BoE.
GBP/USD movement can be seen on the graph below:
The UK's employment rate has increased to 75.6% – the highest since records began in 1971. New stats from the ONS show there were 32.34 million people in work in the first quarter of the year, 396,000 more than a year ago. The data also shows average weekly earnings increased 2.9% compared with a year earlier. Once inflation is considered, this translates as a 0.4% increase, signalling that the year-long incomes squeeze may finally be over.
The story here is that whilst UK PM May met with backbenchers on Monday and was said to admit that negotiations are at an impasse, with neither of the current options for a customs deal able to work, it is Italy that shows signs of being Europe’s real problem. Apparently, a draft copy of the contract between Five Star and La Lega allegedly includes a plan to write off EUR 250bn in debt from the ECB. Whilst a joint statement suggests that this is an old plan which has been "extensively modified", it has still further spooked the markets and EUR value has suffered.
Please mark our words here, Italy is likely to a volcano of destabilisation at the centre of Europe. Please don’t forget that the Italians have over USD 2.338trn of sovereign debt outstanding – the highest level of debt in Europe, six times the level of Greece, and the fourth largest debt in the world after US ($14.915trn), Japan ($9.544trn) and China ($4.305trn). In Euro terms, Italian debt stands at EUR 1.966trn – above France at EUR 1.948trn and Germany at EUR 1.647trn. Take from that what you will but we think it’s a bomba a orologeria!
GBP/EUR movement can be seen on the graph below:
EUR/USD fell to new 2018 lows but managed to bounce after the US Dollar suffered its own disappointing data. GDP and inflation figures stand out as German factory orders fell by 0.9% and added to the misery, while the Eurozone’s largest economy’s industrial output rose by 1%, better than expected. The data is not impressive, but at least not all doom and gloom. In the US, inflation fell short of expectations with 2.1% on Core CPI and weighed heavily on the US Dollar. Fed Chair Powell and ECB President Draghi did not provide any news.
The pair fell into oversold conditions and may stabilize for another week. The flow of disappointing euro-zone data may come to a halt. US data has not been that great recently. Possibly some consolidation is likely after the big falls but as we have seen today the (relatively) big falls are not over yet. At the point of publishing we are heading towards lows not seen since December at 1.1789.
EUR/USD movement can be seen on the graph below:
Not trading your currency is still a risk. The markets will move, volatility and relative values will vary but whatever your foreign currency exchange and international payment needs, you can rely on the team here at Aston Currency Management. Please do not hesitate to get in touch with us, we look forward to hearing from you. Now, if you will excuse me, I have to prepare for a corporate retreat. Have a great week.
Written by Damien Lipman