Daily Currency Update

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Can the pound bounce back?

By Hamish Muress

After a very slow start to the trading week there is real opportunity for sterling to recover some of the losses that were suffered last week. The pound only swung 0.3% against the euro and 0.4% against the USD showing how quiet Monday truly was – maybe the prospect of a royal wedding will excite the markets!

Wage growth excluding bonuses is expected to increase to 2.9% further outstripping inflation and we will have to wait all the way until next Thursday to see the latest CPI figures. As mentioned yesterday, a big hit in these wage numbers will be required to see a substantial recovery for the pound over the next week however, even if this is the case the chances of an August interest rate hike (which is the next opportunity) are relatively slim. It is also interesting to note now that the next set of GDP figures will be released following the August interest rate meeting rather than beforehand which was the norm meaning that the focus will shift back to wage figures vs. inflation.

The Federal Reserve’s Loretta Mester was the highlight of the G10 currency markets yesterday as she spoke at an event in Paris. Mester, who is a voting member for the Fed this year, said that she expects rates to carry on running at their current gradual upward path. This wasn’t too surprising from Mester who is seen as one of the more hawkish members of the Fed, however it is interesting to note that currently the market is pricing in a third interest rate hike at 62% and a fourth at only 38%. You don’t have to go back very many years whatsoever to remember Fed expectations to be for 3 or 4 interest rate hike only to be disappointed with one or none at all. The focus this afternoon will be on the latest retail sales figures.

Yesterday saw further steps taken towards a loose coalition between the two anti-establishment parties in Italy, the Northern League and the Five Star Movement. Whilst the Italian domestic markets took a small hit this is a story that at the moment has failed to waver the euro. The current market view is that these two parties will climb down from their more radical policies and will not rip up the current fiscal prudence that is in place.

This morning has seen Germany GDP mirror that of the Eurozone as expected as it has come in below expectations at 0.3%. Q1 GDP figures have proved to be particularly disappointing for the Eurozone recently and Germany’s figures are the weakest since Q3 2016. Looking ahead, let’s wait to see if today’s ZEW Economic Sentiment offers any optimism moving forward.

Much like elsewhere across the market the Aussie started the week very subdued only trading in a narrow 65 pip range. The highlight for the Aussie this week still remains tomorrow’s wage growth figures which will be released overnight. For a while, wages have not kept pace with the gains in domestic employment pointing to slack in the economy. If the wage figures disappoint once again then the RBA’s neutral policy stance will be cemented.

The loonie lost ground against the USD yesterday whilst trading in a narrow range against the pound. The quiet week for the Canadian Dollar is set to change as a raft of data is released from Wednesday to Friday with retail sales and CPI being the highlights which should put the currency back on the front foot.

The New Zealand dollar started Monday with the hope of holding to some of the gains it had flirted with last week however it lost nearly 1% against the pound making the currency cross uniquely volatile for yesterday’s trading. It looks like the market is still dwelling on the recent dovish monetary policy statement from Governor Adrian Orr.