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Can the pound bounce back and recover loses?

By Hamish Muress

The week kicks off with the UK’s wage growth figures on Tuesday as well as the latest jobs numbers. Following on from a particularly disappointing week last week for sterling we may have to see a distinct jump in these figures for there to be a rebound for the currency. However, the importance of these figures should not be understated, wage growth in particular. From the back end of last year until very recently both the market and the Bank of England wanted to see the real wage growth deficit to narrow and whilst this has finally happened it was disappointing Q1 GDP figures at the final hurdle that meant the MPC kept rates on hold last week. Wage growth therefore still remains paramount.

This writer has long maintained that the summer was meant to be relatively quiet for sterling with regards to Brexit headlines and importantly the downside risks that these bring. However, these headlines appear to be creeping back in more and more and at the weekend Theresa May’s two options for a new customs policy both came under attack from within putting increased pressure on the Prime Minister and the pound.

It will be a successful week for the US markets and the USD in particular as long as the country does not withdraw itself from anymore international treaties or agreements. More seriously though Donald Trump has paved the way for more constructive trade talks with China having given the green light to the US Commerce Department to save the Chinese company ZTE Corp. from going under. Last week the dollar surge looked like it had run out of steam with the currency hitting a number of key levels against the Japanese Yen and Euro. However, with the concerns of a US-China trade war diminishing then the USD could have 1-2 more cents to gain.

It seems to be a while since we last talked of the risks towards the euro from political uncertainty, however similar to Brexit headlines these are creeping back to the fore. Over the weekend the prospect of a coalition between the anti-establishment parties, the Five Star Movement and Northern League, looks more and more likely. For the time being at least the Euro is unmoved. Tomorrow the focus will be on Germany as it delivers its latest GDP figures as well as its economic survey but the market is largely expecting that the Eurozone’s largest contributor will show a slowdown, mirroring the performance of the rest of the block.

The Aussie will focus this week on the important wage growth figures on Wednesday followed by employment data on Thursday as the market will use these releases to gauge the outlook of the RBA. It will need a big shift in these figures for the central bank to change their neutral stance and tomorrow’s minutes should confirm this as well.

The Canadian dollar finished last week on the back foot against the USD whilst making modest gains against sterling. Canadian employment came in weaker than expected however its main driver remains oil prices which dropped 1% on Friday as well as the ongoing NAFTA negotiations. At the end of the week there is an informal deadline in these negotiations and there is a growing risk that there will be no agreement before Friday. On top of this as well, we will also see the release of Canada’s latest CPI figures and retail numbers. All in all a big week ahead for the Loonie.

With the outlook for interest rates in New Zealand being so flat and far the currency now faces the difficult task of producing data that will increase the prospects for the currency in the short to medium term. In the meantime the market will look towards this weeks’ global dairy auction but the currency will be at the mercy of forces elsewhere.