Clinging On

Sterling declines further as PM May clings on to power, while Fed minutes indicate policy on hold for the foreseeable.

Previous Day's Market Highlights

Sterling recorded yet another day of declines on Wednesday, with ever-increasing political uncertainty exerting significant downward pressure on the pound. Throughout the day, calls for the Prime Minister to quit intensified, however the PM seemed to steadfastly refuse to stand down, despite the resignation of Brexiteer Cabinet Minister Andrea Leadsom and the breakdown of Cabinet collective responsibility to back Government legislation increasing the pressure on the PM. The Prime Minister appears to be clinging on by a thread, with the backbench Conservative 1922 Committee set to meet again on Friday - either to hear the PM’s resignation or to change internal party rules to allow a no-confidence vote at the beginning of June. For the pound, which sank 0.4% against both the dollar and euro to fresh 4-month lows, concern centres around three axes - having a Prime Minister with little-to-no support, a Brexit deal with no chance of passing in Parliament and the potential for a new Prime Minister advocating a no-deal exit from the EU. On the data front, the release of inflation figures for April was largely ignored, though CPI increased at a slightly below-forecast 2.1% on a year-on-year basis. The increase was the fastest pace since December 2018, though was largely due to a steep increase in energy prices due to a regulatory change. The less-volatile core CPI measure remained at 1.8% for a 3rd consecutive month, evidencing the lack of inflationary pressures in the UK economy, with the data unlikely to alter the BoE’s policy outlook. 
Elsewhere, minutes from the Fed’s latest monetary policy meeting showed the FOMC remaining on hold for the foreseeable future. Policymakers agreed that the current patient policy approach would be appropriate for some time, while also agreeing with Fed Chair Powell’s assessment that benign inflation is down to transitory factors. The lack of any major new information caused the minutes to have little impact on the dollar, with the greenback gaining just 0.1% against a basket of peers and markets still pricing a 70% chance of a rate cut this year. Meanwhile, the euro held steady over the course of the day with a lack of data releases to drive volatility in the single currency. The Canadian dollar was also largely flat, despite retail sales increasing at their fastest pace since May 2018, a positive sign ahead of next week’s 1st quarter GDP release with increased consumer spending likely to boost economic growth. 
Away from FX, equity markets were mixed, with the pan-European Stoxx 600 trading unchanged, but the US benchmark S&P 500 declining 0.3%. The latter’s decline can be put down to continued investor jitters over US-China trade. Finally, oil prices fell significantly, as a surprise increase in US stockpiles dented a recent rally. Benchmark Brent crude fell 1.5%, while US WTI fell more than 2%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1320 1.1776 1.1312 3.94%
GBP/USD 1.2615 1.3176 1.2610 4.30%
EUR/USD 1.1140 1.1265 1.1110 1.38%
GBP/AUD 1.8360 1.8882 1.8240 3.40%
GBP/NZD 1.9436 2.0021 1.9340 3.40%
GBP/CAD 1.6975 1.7728 1.6902 4.66%

Today's Market Highlights

Focus will lie with the eurozone today, with a number of major economic events on the calendar. Firstly, markets will look to this morning’s flash PMI survey for May as an indication of either green shoots beginning to emerge, or as evidence of a continued economic slowdown. Markets expect the manufacturing sector to remain in contraction for a 4th consecutive month, with the index expected at 48.1. However, divergence between manufacturing and services is expected to continue, with the services sector set to have increased at a modestly faster rate than in April, with the index expected at 53.0. The latter release is likely to command greater attention, with the services sector driving the majority of economic growth across the single currency bloc. Other notable releases include this morning’s IFO business climate survey from Germany, expected to drop to a 3-month low, as well as the lunchtime release of minutes from the ECB’s latest monetary policy meeting. Market participants will be looking to the minutes for clarification of the reasoning behind the ECB’s stimulus package of new TLTROs in addition to the rationale behind a revision to forward guidance indicating rates on hold for the remainder of the year. 
Elsewhere, political news from the UK is likely to be lacking, with broadcast restrictions in place due to today’s EU Elections giving markets a welcome break from the Westminster merry go round. However, the pound is likely to remain under significant downward pressure as markets digest the aftermath of yesterday’s events. Across the pond, a couple of second tier data releases from the US may pique some interest. Initial jobless claims are expected to remain basically unchanged at 215,000 last week, while new home sales are expected to decrease slightly to 657,000 in April. Despite the data, focus is likely to remain on ongoing US-China trade tensions, hence the releases may have little market impact. Overnight, focus will be on trade balance figures from New Zealand, in addition to CPI inflation data from Japan, with the latter expected to show CPI increasing at 0.9% in April, which would be the fastest pace since October 2018. 
Finally, a few central bank speakers are due from both the ECB and the Fed. From the ECB, markets will hear from Vice President de Guindos and Governing Council Member Nowotny, though comments are likely to be similar to those contained in the meeting minutes. From the Fed, a panel discussion involving Kaplan, Daly, Bostic and Barkin may be of some interest.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Manufacturing PMI (Flash - May) 48.1 47.9
9:00am EUR Services PMI (Flash - May) 53.0 52.8
9:00am EUR Composite PMI (Flash - May) 51.7 51.5
12:30pm EUR ECB Meeting Minutes
1:30pm USD Initial Jobless Claims 215k 212k
3:00pm USD New Home Sales (m/m - Apr) 0.675mln 0.692mln