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Risk Sentiment Improves As Merkel Makes Migration Deal Concessions.

By Alex Edwards

UK Manufacturing PMI printed at 54.4 on Monday, up from 54.3 and vs. expectations for 54.1. Although safely in positive territory the report highlighted that “the slowdown in new order growth since earlier in the year has also left manufacturers increasingly reliant on backlogs of work and inventory building to maintain higher output”. The June survey also saw business optimism drop to a seven-month low amid rising concerns about possible trade tariffs, the exchange rate and Brexit uncertainty.

Sterling barely reacted to the headline print, however, and fell away throughout the day as risk aversion continued to weigh, seeing GBP/USD drop from around 1.3170 before finding support again at 1.31. It’s currently higher at 1.3150 but risk sentiment remains somewhat negative with US trade war rhetoric and political uncertainty in Germany helping to support demand for safe haven assets.

Construction PMI is next up this morning, but the way markets have been reacting to data recently, this could well be ignored with political developments tending to dominate.

The dollar strengthened throughout the day yesterday as trade war fears lingered and concerns for the stability of Merkel’s government intensified. Trump said yesterday that “if the WTO doesn't treat us properly, we will be doing something". Global equities opened lower on the day and the dollar remained broadly strong throughout London and New York sessions on Monday.

US ISM Manufacturing PMI also printed better than market forecasts on Monday at 60.2 vs. 58.2, providing some extra support to the greenback. There isn’t any major data releases due for today from the US and with the World Cup in full flow and a US bank holiday tomorrow, it might be a steady session today, but with tariff tiffs and developing political instability in the UK and Germany, we can’t rule out volatility entirely.

Yesterday, Angela Merkel found a temporary solution with its Bavarian sister party, the Christian Social Union, over the immigration plan imposed last week. It will agree to send any immigrants who entered via Bavaria’s border back to Austria, at least those that originally applied for asylum in Austria. The impasse had been weighing on market sentiment, pushing EUR/USD lower, seeing it briefly drop below 1.16 before rising on the news. This euro rally means that GBP/EUR is back below 1.13.

In other news yesterday, German manufacturing PMI printed in line with expectations at 55.9. French and Italian PMIs printed below and above forecasts respectively. Like the UK number, the data was largely shrugged off.

The Australian dollar fell through the day yesterday as risk sentiment waned. AUD was also discouraged from pushing higher following softer than expected Chinese and Australia data releases. The Chinese Caixin Manufacturing PMI fell slightly as did the Australia AIG Performance of Manufacturing index. While they were only marginally softer than expected, the result did not help market sentiment.

The RBA announced last night that it was keeping interest rates on hold, as expected, and there were hardly any changes to the statement compared to last month. The central bank gave a nod to the rising USD and made reference to the potential follow through from problems in emerging markets. Ultimately, it wasn’t enough to move the AUD.

AUD is on a bit of a charge higher this morning, however, supported by a recovery in global equities and rising bond yields. If risk sentiment continues to improve we could well see the AUD continue to make gains.

The loonie ended up the session around 0.20% weaker versus the USD at 1.3189 yesterday. USD/CAD broke above the important 1.32 level in the early hours of the US session as stronger than expected US PMI data helped the pair reach a new session high at 1.3225.

The CAD has recovered a bit overnight thanks to a positive reversal in oil prices and USD/CAD opens this morning at 1.3165.

NZ business confidence printed slightly weaker than expected overnight. It prompted NZ Finance Minister Robertson to make a few comments in support of the economy following a recent run of poor confidence indicators. NZD/USD has bounced back following the sell-off overnight, however, as risk sentiment turns slightly more positive.