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Euro drops on Italian coalition rumours.

By Jake Trask

It’s a relatively quiet end to the week from the UK with little data of note from the past 24 hours or indeed today/tomorrow. Sterling movement is likely to be driven by news from today’s EU leaders meeting in Bulgaria where informal talks are expected on Brexit. A report in The Daily Telegraph claiming that the UK was willing to stay in the Customs Union beyond 2021 had seen GBP/USD push towards 1.3550 overnight however the story has been denied this morning sending cable back towards the big number. Looking ahead, next week’s crucial data will be UK CPI and Retail Sales numbers due on Wednesday and Thursday respectively. With Mark Carney highlighting the current weakness in the UK economy at this month’s interest rate decision these numbers will be likely given extra scrutiny by investors. GBP/USD hovers around 1.3520 at the moment.

The dollar continues to be well bid across the board as Treasury yields continue to rise with 10 year bonds currently at 3.1%. USD/JPY has got a foothold above 110 and will be looking to take out 111 this week should the momentum continue. Data-wise yesterday saw a mixed bag of mid-tier prints with Building Permits on target at 1.35m however the accompanying Housing Starts figure fell short at 1.29m. Capacity Utilisation fell short at 78% however this was offset by Industrial Production figures beating target at 0.7% m/m. Like the pound it’s a relatively quiet end to the week for the greenback so expect Trump and yields continue to dominate the news.

The main moves in the FX world came from the euro yesterday as unconfirmed reports emerged that the proposed Italian Five Star and Northern League government coalition were looking to ask the European Central Bank for €250b of debt forgiveness. The report which saw the euro plummet with EUR/USD dropping below 1.18 for the first time since December however it recovered as the report was denied as being official policy by the two populist parties. Away from politics, yesterday saw Final Eurozone CPI for April unchanged at 1.2% y/y. With signs the Eurozone is slowing and inflation still way under target it seems likely a tapering of asset purchases will be announced at next month’s ECB interest rate decision rather than a stopping of the program altogether in September. EUR/USD trades at 1.1815 and GBP/EUR is holding above 1.14.

The Aussie rose overnight despite the Unemployment level unexpectedly rising from 5.5% to 5.6%. The report saw more people added to the workforce than expected and the highest participation rate since 1978. This was seen as a net-gain and AUD/USD jumped around 20 pips as a result however the gains fell away as Europe came online as US Yields came back into focus. GBP/AUD trades at 1.7955.

With Brent Crude oil heading towards $80 for the first time in 3 and ½ years the oil rally is adding support to the Canadian dollar with USD/CAD falling back below 1.28 yesterday afternoon when a move above 1.30 looked on the cards earlier this week. Falling crude output in Venezuela and tensions re: Iran have added support to Brent over recent weeks. Tomorrow we have CPI and Retail Sales figures from Canada. GBP/CAD sits at 1.7275.

New Zealand, Prime Minister Jacinda Arderns coalition government produced their first budget overnight with public services getting a spending boost. Highlights announced by Finance Minister, Grant Robertson were increased spending on health, housing and education however the markets didn’t seem overly impressed with the policies sending the Kiwi lower. GBP/NZD trades at 1.9640.