Global Themes

  • Dollar calm after US-Korea summit
  • Pound already under pressure in critical week
  • German ZEW in focus this morning

USD

Dollar calm after US-Korea summit 

The US Dollar strengthened slightly against its major peers after the US-North Korean summit got off to a positive start. US President Donald Trump said he has ‘forged’ a good relationship with his North Korean opposite and is confident the two countries can reach a diplomatic breakthrough (source: Reuters). The US Dollar index, a measurement of dollar strength against a basket of 6 currencies, is up over 0.2% this morning. The most notable move is against the Japanese Yen, where the pair is now perched at a 3-week high above the ¥110 handle.

Although the summit has started on a positive note, investors could remain cautious to see whether talks develop into any actual actions. Now with that event over, market participants will turn their attention to US CPI this afternoon, and then to tomorrow’s important interest rate announcement from the Federal Reserve (Fed).

  •  The inflation number for the US today is expected to rise to 2.7% from 2.5% y/y for the period of May. Should the number come in line or exceed this, the dollar could most likely gain further momentum. EUR/USD has already fallen away from the $1.18 handle this morning, down close to 0.4%, back towards the mid $1.17. Downward momentum could see the pair test levels last traded at the end of May. A fall back to this region in EUR/USD could cause havoc for GBP/USD, with the potential to open up the $1.30 level.


GBP

Pound already under pressure in critical week 

The British Pound endured a bad start to a big week after disappointing data releases for both manufacturing output and the goods trade balance. Manufacturing output dropped in April by -1.4% m/m, the biggest fall in 5 years, falling from the previous print of -0.1% and falling well short of forecasts of 0.3% growth. To add to Sterling’s woes, the UK trade deficit widened by £1.9bn to £9.7bn in the three months to April 2018 (source: Guardian). GBP/USD dropped to a low of $1.3340 and GBP/EUR fell to €1.1320 as result.

Wage and unemployment data is released at 9:30am this morning, with average earnings expected to have risen by 2.9% over the three month average. The pound will need this figure to at least come in line with forecasts to claw back yesterday’s losses, and for market participants to have confidence that the Bank of England can still look at possibly raising interest rates before year-end. Unemployment is expected to stay at the 42 year low of 4.2%.

  •  The House of Commons will begin debating and voting on Brexit legislation today, and this will be ongoing for the next two days. MP’s will be voting on amendments tabled by the House of Lords, and the government will be pushing hard to avoid defeat on key areas of the UK being in the European Economic Area (EEA). The government is expected to avoid defeat, which will disappoint market participants looking for a ‘softer’ Brexit but would mean Prime Minister Theresa May will avoid further serious questions over her leadership.


EURO

German ZEW in focus this morning 

In the build-up to this week’s key event for the Eurozone, a plethora of economic data from the bloc will be released and scrutinised. The European Central Bank (ECB) makes its policy decision on Thursday, which is the salient event market participants will be gearing up for, but prior to this we have the German ZEW surveys kick-starting this week’s Eurozone data docket. The ZEW surveys on current economic conditions and sentiment in Germany this month will be unveiled at 10:00am this morning.

The data is expected to show a deterioration on both accounts, most notably the economic sentiment is forecast to have weakened to -14 from -8.2 last month. This could be to do with the political uncertainty and instability from Italy, but either way, if the data falls in line with expectations, the Euro could suffer downside risk.

  •  EUR/USD lacked any significant directional conviction yesterday but overall closed the day out in negative territory. If the trend continues today, a slip towards €1.17 or lower cannot be ruled out. GBP/EUR has yet to capitalise on the weaker Euro and remains subdued around the €1.13 handle. With plenty of key risk events to hit the headlines this week, currency markets are likely to be in for a mammoth game of tug of war.

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