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European Politics Dominate Headlines Amid Heightened Volatility

By Alex Edwards

The pound received a boost from better than expected UK economic data on Friday. The UK’s current account deficit printed at £17.7 billion in Q1 vs. expectations for £18.0 billion. Final Q1 GDP printed at +0.2% vs. forecasts for +0.1% whilst second tier data in the form of Index of Services and Mortgage Approvals also best expectations. GBP/USD also got caught up in the tailwind of EUR/USD which made some solid gains on the back of the EU deal migration.

The pound hasn’t exactly started off on the front foot this morning, however. Investor have perhaps been happy to sell into Friday’s closing highs following the some of the negative Brexit headlines in the weekend broadsheets. Market participants will now been keen to understand some of the details from the third model devised by the government for handling customs following the UK’s exit from the EU, most of which will be discussed by members of the cabinet at Chequers later in the week.

The week ahead is looking fairly busy in terms of data; Manufacturing PMI, Construction PMI and Services PMI are released today, Tuesday and Wednesday respectively. Bank of England Governor Carney is then due to speak on Thursday.

The US dollar was weaker on the day on Friday, with a better bid EUR/USD weighing on the dollar for most of the session. US data from Friday didn’t do the greenback too many favours either with Personal Spending printing weaker than expected but Chicago PMI coming in better than forecasts.

Looking ahead this week and the US macroeconomic calendar will be quite busy. Tuesday will see the release of both ISM Manufacturing PMI and Construction Spending. Wednesday will be quiet on the back of a US Bank Holiday but no doubt this weeks’ attention will remain firmly focused on Thursday’s FOMC meeting minutes and Friday’s non-farm payrolls. The economy is expected to have added 200K new jobs somewhat less than the prior 223k, whilst the unemployment rate is seen steady at 3.8% in June. Wage growth is seen up 0.3% mom and 2.7% YoY, matching April figures. The greenback could well get back on track extend last week’s strong gains if US wage growth and employment numbers shows signs of strength.

The euro was one of the best performing major currencies on Friday, buoyed by the news that EU leaders had reached a deal on migration, as detailed in Friday’s commentary. However, EUR/USD has since come off of Friday’s highs, not helped by the fact that Germany’s coalition government is seemingly in disarray after the country’s interior minister reportedly announced his intention to resign over such a deal with the EU.

EUR/USD has slipped back 50 points or so overnight and opens in London at 1.1635. The European economic data calendar is looking a little light this week and so Brexit related headlines and any news, negative or positive, regarding the future of Merkel’s government will likely steer EUR/USD direction.

The Australian dollar edged back above 0.74 U.S cents late Friday following last minute month end rebalancing and USD sell off. The world’s base currency edged lower into the daily close as mixed macroeconomic data and an improved appetite for risk forced the unit to a three-day low when measured against a basket of major currencies counterparts.

AUD/USD has fallen back a little in overnight trade, tracking EUR/USD lower. Investors and traders will now turn their attention to the RBA Rate Statement early tomorrow morning BST and Australian Retail Sales and Trade Balance on Wednesday.

USDCAD fell almost 1% to 1.3133, the lowest level in the last 2 weeks following an important increase in rate hike probabilities for the next BOC meeting on July 11th (chances of a hike moved to around 80% from 50% earlier in the week).

The loonie was supported by broad USD weakness, strong oil prices and relatively better than expected economic data with industrial prices for May coming in at 1% (vs. 0.9% expected) while GDP came at 0.1% (vs. 0% expected).

This week will bring manufacturing, unemployment data and probably more NAFTA related headlines. From a technical perspective, we’ll have to see if the USDCAD is able to hold above 1.3135 or we can confirm a downward break and we go back to the 1.2950/1.31 range.

The New Zealand dollar enjoyed month end support as investors - buoyed by a renewed European migration deal - bolstered demand for higher yielding assets. Creeping back towards 68 U.S cents, the NZD touched intraday highs at 0.6792 but struggled to foster any real momentum and drive beyond resistance, and the pair opens this morning marginally lower at 0.6750. The kiwi still looks susceptible to a move lower, having been one of the worst performing currencies last week and without much in the way of local NZ data due out this week.