Be more realistic
Post Brexit trade talks and concerns for the economic recovery kept Sterling sentiment weak on Friday. The Euro strengthened to the 1.1111 mark, peaking around 1.1050 Michel Barnier’s Senior Advisor stated there was no appetite from individual countries to revise the EU mandate. The Pound managed a late rally back to near 1.1111 against the Euro, largely on month-end positioning, and settled near 1.2350 on the Dollar. Futures market data recorded a small increase in bets against the Pound for the 12th successive week.
Over the weekend, Michel Barnier stated that UK negotiators needed to be more realistic and the UK team accused the EU of trying to extend talks into November. As it stands, talks recommence on Tuesday and the Pound will be vulnerable top headlines. Also reported over the weekend, the Seven Dwarves have been told that as of Monday morning they can meet in groups of six. One of them isn’t happy.
The Pound is a little higher this morning, 1.2400 against the Dollar, as global risk appetite remained firm.
The US core PCE index declined 0.4% in April compared with market expectations of 0.3% with the year-on-year declining sharply to 1.0% from 1.7% and the lowest reading for over 9 years. The sharp decline in the Federal Reserve’s (Fed’s) preferred inflation gauge will maintain pressure for a very aggressive monetary policy. Personal spending declined 13.6% for April compared with expectations of a 12.6% decline, reinforcing fears over the second-quarter GDP outlook. The Chicago PMI index declined to 32.3 for May from 35.4 previously and the lowest reading since March 1982. There was a sharp decline in order backlogs, although employment declined at a slower pace.
Cleveland Fed President Mester stated that US economic recovery is likely to be slow and hard to imagine a V shape. Policy support is likely via forward guidance and asset-buying while yield-curve control is a discussion for a future phase. Fed Chair Powell reiterated that the central bank was broadly opposed to negative interest rates, although the comments had little overall impact. The Fed will now be in a blackout period ahead of the June 10th policy meeting.
The headline Euro-zone CPI inflation rate declined to 0.1% for May from 0.3% previously which was in line with consensus expectations and the lowest rate since June 2016. The core rate held at 0.9% and was above market expectations of 0.8%. Annual M3 money supply growth strengthened to 8.3% from 7.5% previously.
The Euro gained an element of support from month-end positioning and an element of optimism that the EU recovery plan would help support the Euro-zone economy. It pushed to 2-month highs near 1.1150 before a correction to near 1.1100. There was a small increase in the long Euro non-commercial position, limiting the scope for further gains.
Data To Watch
14:00 – USD – ISM Manufacturing PMI