Please allow me to open this week’s update by thanking you for still being here with us, for agreeing to continue to receive our musings and commentary on the currency markets. It struck me how relevant “Mama Mia”, Abba’s famous song is so relevant now in this time of Italian and Spanish tempest:
If you are reading this then you survived the GDPR deluge of emails shuffling up to you during the darkest hours and begging for you to continue to subscribe to the marketing and musings of websites and service providers you thought were long since gone. Thank you for sticking with us.
This last week has been largely range bound but none the less exciting. Italy is at the centre of European attention. Remember what I wrote two weeks ago? Possibly not but we made it clear that Italy was going to be the epicentre for the next shockwaves to cross the European Union and here we are. The government’s program has been tamed but will likely result in a high deficit, which is worrying markets. The Italians do not feel that they have benefited from economic recovery and its not as if the Italian electorate enjoys the sound of silence.
French President Emmanuel Macron has declared his support for a Cottarelli led technocratic government, saying President Mattarella had shown a “great spirit of responsibility” to “protect his country’s institutional and democratic stability”. It’s precisely this sort of statement that will anger the populists and wavering voters. The decision clearly is not democratic – the Italian President is preventing the formation of a government, which has a majority vote and a majority of seats. Protecting institutional stability will not resonate with voters who have a vague anger at “institutions” and “experts” already (does this sound familiar?). The fact it is coming from the French President, whom the Italians already see as subjugating Italian interests for those of France, will only exacerbate this further.
Spanish politics joined the list of worries. A Vote of No Confidence is tabled for Friday, and Ciudadanos say they will give Rajoy their vote, in order that they can engineer an orderly exit and new elections. The same threats to Spanish participation within the EU do not exist any thing like the same way as they do in Italy but make no mistake, we live in extraordinary times.
Spain’s opposition tabled a no-confidence motion after the ruling PP party was convicted of corruption. Euro flash PMI data came out mostly below expectations and implies that the slowdown extends well into the second quarter. The ECB Meeting Minutes reiterated the same cautious messages seen in the rate decision.
Essentially it is all for the EUR to lose ground and GBP is simply treading water, still beleaguered by its own ongoing Brexit woes.
GBP/EUR movement can be seen on the graph below:
GBP/EUR - 1 Week
While inflation dropped to 2.4% y/y, retail sales leaped by 1.6%, providing promises of a Spring comeback. Q1 GDP growth remained unchanged at 0.1% q/q. GBP/USD also depends on how the USD reacts as it enjoys safe haven flows. USD took advantage of fears related to global trade, in principal the US/China trade war, and the cancellation of the Kim-Trump Summit, which is itself either a masterful ballet of nuanced international relations or a pair of hippos with button related insecurities. The Fed confirmed a rate hike in June via its Meeting Minutes and whilst that will move the market it will likely be priced in when it comes.
GBP/USD movement can be seen on the graph below:
GBP/USD - 1 Week
In the US, the Fed minutes showed that the Fed will allow for somewhat higher inflation, but they cemented the likely June rate hike. USD also enjoyed the risk-off sentiment that is a result of trade fears. Trump’s decision to cancel the meeting with Kim Jong-un weighed on markets but had little impact on EUR/USD.
US ADP Non-Farm Payrolls came out at 178K in May, lower than 190K expected. In addition, the figure for April was revised down from 204K to 163K. 15 minutes later, US GDP was revised down from 2.3% to 2.2%, also worse than expected. The Personal Consumption component dropped from 1.1% to 1%. All in all, the data came out below expectations, but the US Dollar appears to have just shrugged it off.
EUR/USD movement can be seen on the graph below:
EUR/USD - 1 Week
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 move to our new offices on Savile Row.
Have a great week.
Written by Damien Lipman with an appropriate hat tip to Abba.