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How will the markets react post G7?

By OFX

The relatively disappointing week for the pound, despite better than expected UK Construction PMI release starting the week off, printing at 52.5 vs. 52.0. The GBP/USD came close to breaking 1.34 on the news. Alas, it couldn’t quite make it, and then duly broke down through various support levels, losing close to 100 points on Monday's session.

The war of words on US trade tariffs rumbled on too with Theresa May calling US tariffs “unjustified and deeply disappointing”. In other news, May is also set to delay the release of a Brexit white paper until after the EU summit at the end of June. Reports also revealed that the House of Commons will vote on the Brexit bill on 12th June, which gives them the opportunity to discuss 15 separate amendments made by the House of Lords. These headlines were hardly positive for the pound and GBP/USD struggled to recapture any gains for the better part of the week.

To close out the week, Brexit returned to weigh on the pound as UK Prime Minister, Theresa May managed to put together a proposal with regards to a UK/EU customs arrangement that was enough to stop Brexit Secretary David Davis from resigning and possibly cause a leadership contest to be launched. With the Irish border/customs situation continuing to be an unsolvable problem the PM held a meeting with Davis and others and finally communicated that the UK Government “expects” the current customs arrangement to last no longer than December 2021, when the transition period comes to an end. The fudged statement was enough to keep the wolf from the PM’s door and appease Brexit hardliners, for now.

Next week will be a busy week for the pound, with a myriad of releases including wage growth, inflation, and retail sales numbers from the UK.

The euro has rallied over the past week as a coalition was finally formed in Italy and comments from European Central Bank policy maker’s added support to the single currency. With markets undecided as to when the ECB would announce the beginning of the end of its Quantitative Easing Program it now seems likely we will get an announcement at Thursday’s interest rate meeting. The median consensus is that the ECB will confirm an extension to QE at a reduced rate of between €10-20b a month until the end of the year before ending the emergency measures which have done much to shore up the EZ economy over the past few years. The finer details of the decision will be scrutinised, with a euro rally expected should Mario Draghi confirm this will definitely be the end of QE and not leave the door open for further stimulus in 2019.

We can expect the euro to bolt should Draghi confirm there will be no taper and QE will finish in September, however, this would likely rattle the markets so we should expect an extension of some sort to be confirmed.

With the trade war rhetoric ongoing markets brushing off increased US trade tensions to begin the week with positive risk sentiment, and the USD exhibited broad-based weakness on the earlier sessions, especially against commodity currencies such as the AUD and NZD.

This rhetoric has seen a number of stances, with China saying that they will purchase 70B of US farm goods if the administration drops the 50B in tariffs scheduled to come into effect July 1st and the European Union announced a three-tier plan of its own from tariffs to legal action, and protection of disruptions in its steel marketplace. This is all in retaliation against the US after 25% steel and 10% aluminum tariffs that were put into practice the 1st of June against Canada, Mexico, and the EU. The European duties will be put in place July 1st if an agreement is not reached in time between the US and EU.

The market reaction on currency has been decidedly mixed as other factors come into play such as the ECB announcing the timeline of when QE is done in the EU, the announcement should be stated at the ECB’s interest rate settings and policy meeting this week.

The outcome of the G7 meeting in Quebec remains in question heading into this week. Can talking heads come to a definitive settlement on trade and tariffs without turn the global market into turmoil and an all-out trade war? Market participants are asking this question and if the answer is murky, expect some volatility in the currency market.

The AUD started the week strongly, surging more than 1% against its US counterpart on the back of some strong domestic data on Monday and an improvement in broader global risk sentiment. The story was largely retail sales driven however the commodity-linked currency also found support on the back of rising copper and gold prices.

Taking a closer look at the impressive retail sales numbers, the seasonally adjusted 0.4% read comfortably surpassed market expectations which were pricing an increase of just 0.3%. The bulk of the increases appear to be linked to abnormally warm weather in the month of April, with spending in restaurants, cafes and fast food outlets outweighing sharp declines in apparel and department store sales. Although many economists are still bearish on whether the recovery can be sustained when underlying conditions such as low wage growth continue to stretch household budgets, the strong rebound is a supportive indicator leading into the weeks GDP release.

Mid-week and as widely expected, the RBA maintained it’s current monetary policy stance at the monthly meeting keeping the cash rate on hold at 1.5% for the 20th consecutive meeting. Whilst highlighting that recent Australian data has been largely in line with their forecasts for growth to pick up above 3% in 2018 and 2019, they remain cautious on uncertain areas of the economy, especially consumer spending, low wage growth and inflation. With no substantive changes in tone evident in the post meeting statement, data on unemployment, wages, inflation and the housing market will remain key for the policy outlook in the near term.

The Australian dollar finished the week edging lower through trade as investors sold into Wednesday’s rally and the currency underperformed, falling against most major counterparts. Having touched intraday and 6 weeks highs at 0.7675 investors dumped the commodity-driven unit after April’s trade balance report missed the mark and exports fell further than anticipated. While the soft read was softened somewhat by an upward revision to March numbers the slowdown suggests the export-led growth enjoyed in Q1 may not be carried through Q2 and will be unlikely to drive improvements in wage growth and inflation expectations anytime soon.

The CAD began the week losing more than 0.25% after the US employment reports on Friday. As USDCAD climbed all the way to 1.3008, it did manage to recover somewhat and close below 1.2970 in the opening sessions. Uncertainty around NAFTA negotiations and the recent negative performance of Crude continued to put downward pressure on the loonie throughout the week.

The CAD was lifted by reports that US Treasury Secretary Mnuchin has urged President Trump to exempt Canada from the steel and aluminum tariffs and it’s these trade talks that will likely continue to drive movements in USD/CAD in the near term, rather than data. Elsewhere, elections in Ontario saw a 15-year Liberal reign comes to an end and a Progressive Conservative majority government was formed lead by Doug Ford. Ford is the brother of the late Rob Ford the Toronto mayor that admitted to smoking crack that gained international attention.

The week ended with G7 leaders meeting on Friday in Quebec and tensions are running high. Comments made by French President Marcon only added to this, where Marcon stated: "if President Trump wants to isolate the US, he would have no problem signing a G6 joint statement".

Spurred downwards by positive employment figures out of the US, the Kiwi was the unfortunate recipient of a resurgent Greenback which rose against most currencies at last weeks open.

The Impetus for the drop was a better than expected non-farm payroll report which had a few positive headlines. Both the jobs created and the unemployment rate beat expectations, leading to a strengthening of the USD. Across the Atlantic, the situation in Italy seems to have a resolution in sight, calming markets for the time being and allowing risk appetites to remain healthy and supporting the NZD. With NZD specific news relatively scant throughout the week, the New Zealand dollar traded rangebound, hovering around the 0.7030 level against the USD with second-tier local macroeconomic data failing to surprise markets and continuing to point towards a soft upcoming Q1 GDP read.

NZD/USD did manage to reach monthly highs of 0.7060 towards the back end of the Sydney session mid-week but was unable to preserve these gains with the pair retreating to levels around 0.7030. Movements into this week will largely be determined by sentiment off the back of the G7 meetings, which this year are being held in Quebec.