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Risk off as negative US/China trade headlines hit.

By Alex Edwards

GBP/USD drifted lower throughout the day yesterday as the dollar recaptured lost ground from earlier in the week. US stocks recovered a little and US economic data was generally positive, with both Chicago PMI and CB Consumer Confidence beating market expectations. Other than that it was a fairly quiet session in London and New York on Tuesday as GBP traders sit on the sideline ahead of the much anticipated Bank of England rate announcement tomorrow.

We do get some UK economic data today by way of Manufacturing PMI, usually a market moving set of data, but with Super Thursday on the horizon, it might pass without much ado. US employment and manufacturing data is due later in the day, before the US FOMC Statement later on this evening, and in this respect we may see some pressures exerted on the USD.

The USD finished the day broadly stronger yesterday, supported in part by the release of better than expected US economic data. As mentioned above, Chicago PMI beat expectations at 65.5 vs. 62.0 and CB Consumer Confidence printed at 127.4 vs. 126.5. The employment cost index came in a little shy of market expectations and other data including personal spending, personal income and the PCE Price Index came in as expected. US equity markets also recovered slightly and dollar yields fell.

It’s a busy day for US data today too with ADP Non-Farm Employment Change, ISM Manufacturing PMI and the FOMC Statement due. The Fed aren’t expected to raise rates this time around, but are expected to signal potential rate hikes in September and December. Meanwhile the trade war rhetoric rumbles on with rumours and reports circulating that the US are set to propose raising tariffs on $200bn of Chinese imports to 25%. Risk is off as a result, this being mildly supportive of the greenback, so far.

Like GBP/USD, EUR/USD fell throughout the day on Tuesday as the dollar strengthened across the board. Data wasn’t particularly supportive of the single currency either, being generally mixed; Spanish GDP printed at 0.6% vs. 0.7%, European CPI Flash Estimate printed at 2.1% vs. 2.0% and European Prelim Flash GDP printed at 0.3% vs. 0.4%. A host of European Manufacturing PMIs have just been released too, and like yesterday’s data, it was all a bit mixed, and so not particularly supportive of the euro.

EUR/USD is back below 1.17 this morning as all eyes now turn to US data and the US central bank announcement. The trade story will likely start to take centre stage too.

After making good gains through the day yesterday, along with most other commodity currencies, AUD/USD has fallen back overnight as the trade rhetoric takes another negative turn. Headlines around proposed 25% tariffs on Chinese imports into the US has hit risk appetite fairly hard in the last 12 hours or so, with AUD one of the main currencies to suffer.

Depending on how this trade story develops we could see some further weakness in the AUD against a backdrop of a broadly stronger USD. Other than this, the focus for AUD/USD traders will be on US data and the Fed’s interest rate announcement this evening. Australian Trade Balance is also due for release later tonight.

The CAD strengthened yesterday following the release of better than expected Canadian GDP data with the headline number printing at 0.5% vs. expectations for 0.3%. USD/CAD slipped under 1.30 on the news but has since recovered as risk appetite wanes in the face of the negative US/China trade story.

NZD/USD has gone the same was as AUD/USD – south. The Trump administration is planning to propose a 25% tariff on $200bn of imported Chinese goods after initially setting them at 10%, and the headlines have hit commodity currencies including the NZD and AUD the hardest. The kiwi also suffered at the hands of the release of weaker than expected NZ employment data overnight; the unemployment rate printed at 4.5% vs. expectations for 4.4%, although Employment Change came in slightly better than market forecasts.