Market reconsiders no-deal risks
Domestic political risk caused yet more Pound losses on Friday morning and the Labour Party formally confirmed the closure of Brexit negotiations with the government. Labour blamed government instability for the lack of agreement and both parties expressed concerns that any deal would cause major party rifts. The increase in uncertainty undermined Sterling as there is no clear path to Brexit agreement and market speculation of a no-deal outcome increased.
Sterling declined to near 1.2720 against the Dollar, fresh four-month lows, and the Euro climbed to the 1.1400 area. Theresa May announced an improved Brexit Withdrawal Agreement was to be put before parliament but across the board, there was little confidence of its chances of acceptance. This morning oil price rises have given the Pound limited support with only a marginal retracement and political concerns remain the focus.
The US Administration confirmed that there would be a delay of up to six months on a decision whether to impose tariffs on EU auto exports. Trade Representative Lighthizer will lead negotiations and update President Trump within 180 days. Despite a brief bounce, the Euro struggled to gain any significant relief against the Dollar from the report as underlying sentiment remained negative.
The US University of Michigan consumer confidence index strengthened to 102.4 for May from 97.2 previously. This was well above consensus forecasts and the highest reading for fifteen years with significant gains in both current conditions and expectations. The data underpinned confidence in the US outlook and the Dollar continued to gain underlying support by default given a lack of confidence in other major currencies. The Euro declined to the 1.1150 area and failed to secure a significant recovery as the Dollar secured wider support.
Despite the US confirming that a decision on whether to impose tariffs on EU products was delayed by up to six months, the Euro had a fairly tough ride on Friday. Fears over Italian fiscal risk really curbed any significant growth. Deputy PM Salvini confirmed that the government is more than ready to break the EU’s rules over its the debt-to-GDP ratio in a move that seriously undermined the Commission and increased uncertainty in an already volatile area. Increased Brexit uncertainty also exerted downward pressure on the single currency.
Over the weekend the German finance ministry’s monthly report said that external risks for the economy remained high and manufacturing was like to remain subdued, keeping the Euro at the 1.1150 level versus the Dollar. Today sees the German producer price index, swiftly followed by EU current account numbers. A couple of speeches today from the EU’s Praet and the Bank of England’s (BofE) Broadbent sandwich the German Buba monthly report but all eyes remain on Italy and the Brexit talks.
Data to watch:
04:30 JPY Industrial Production (YoY) (Mar)
06:00 EUR Producer Price Index (MoM) (Apr) (Germany)
08:00 EUR ECB’s Praet speech
12:30 USD Chicago Fed National Activity Index (Apr)
16:30 GBP BoE’s Broadbent speech
17:05 USD Fed’s Clarida speech
23:00 USD Fed’s Chair Powell speech