Deadlocked Deals

Risk appetite sours as US-China trade talks breakdown, while the Brexit impasse pressures the pound and the loonie gains after a bumper jobs report.

Previous Day's Market Highlights

The Canadian dollar was the best performing major currency on Friday, rallying after an upbeat employment report showed once again the resilience of the labour market despite economic headwinds. Data showed the Canadian economy added 106,500 jobs in April, the largest 1-month jobs gain since comparable records began in 1976, and well above market expectations of a modest 10,000 increase. The details of the report were also positive, with the unemployment rate falling further to 5.7%, nearing a 40-year low, and average hourly earnings increasing at 2.6% on a year-on-year basis. The latter two data points emphasise the tight nature of the labour market, with increasing wages likely to spark inflationary pressures over the coming months. Furthermore, going by recent surveys, labour shortages have been frequently cited, hence wage growth may increase further over the remainder of the year. Over the course of the day, the loonie gained a shade over 0.5%, reaching its strongest levels against the dollar this month. 

Elsewhere, the pound declined modestly as a continued lack of progress over Brexit outweighed a relatively strong GDP report. The UK economy grew at 1.8% on a year-on-year basis in the first quarter, the fastest pace since the third quarter of 2017, though the growth came largely due to stockpiling ahead of a potential no-deal Brexit. Stockpiling added around 0.7% to GDP, though an unexpected increase in business investment and consumer spending, the latter reaching a 2-year high, suggests that economic momentum could remain relatively strong. However, a note of caution is required, as Brexit-related impacts continue to cloud the picture of the UK economy, and make assessment of the state of play difficult. Markets largely shrugged off the GDP release, which was in line with expectations, instead focusing on the continued Brexit impasse, resulting in the pound losing 0.2% against the dollar and the euro, recording a 5th consecutive daily loss against the single currency.  

Meanwhile, in the US, inflation figures were released slightly below expectations, though showed prices increasing in line with the Fed’s target level. Headline CPI increased at 2.0% on a year-on-year basis in April, the fastest pace since November 2018, with the uptick in inflation aided by a resurgence in fuel prices. Core inflation, which removes the effects of volatile food and energy prices, increased at 2.1% on a year-on-year basis, a modest uptick from March’s figure. The release seems to align with Fed Chair Powell’s assessment of benign inflation being “transitory” with a gradual pickup in prices now apparent. Despite this, markets still price one 25bps rate cut within a year, a fact that appears unlikely to occur at present. On Friday, the downside surprise in inflation figures weighed on the dollar, with the greenback losing 0.15% against a basket of peers. 

In other markets, equities rallied despite ongoing US-China trade tensions after President Trump confirmed that dialogue between the two nations would continue despite Friday’s talks concluding early without an agreement. The pan-European Stoxx 600 closed up by 0.3%, while the US benchmark S&P 500 rose 0.4%, a 2nd consecutive daily gain. Finally, oil prices traded flat to conclude the week, with trade tensions offsetting tightening supply.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1585 1.1776 1.1512 2.24%
GBP/USD 1.3010 1.3176 1.2866 2.35%
EUR/USD 1.1230 1.1323 1.1110 1.88%
GBP/AUD 1.8665 1.8882 1.8093 4.18%
GBP/NZD 1.9785 2.0021 1.9242 3.89%
GBP/CAD 1.7485 1.7728 1.7300 2.41%

Today's Market Highlights

A fresh week begins with little in the way of economic data, with no major releases due from anywhere in the G10 FX world. Markets are therefore likely to continue chewing over last weeks geopolitical developments, namely escalating trade tensions between the US and China in addition to any fresh Brexit developments. Regarding the former, markets will be on alert for any retaliation from China in response to the US imposing 25% tariffs on almost half of Chinese imports, while also keeping one eye on President Trump’s Twitter feed should rhetoric be ramped up further. Meanwhile, markets will look to a fresh round of bipartisan Brexit talks, though hope of a deal before next week’s European elections is quickly fading. Reports persist that, should a deal not be reached, the Government would bring forward the Withdrawal Agreement for a fourth vote in Parliament ahead ofnext Thursday’s elections. Should the vote fail, as is likely, a series of indicative votes would then be held to attempt to find a consensus outcome. The proposed plan has certain air of déjà vu about it. 

Elsewhere today, central bank speakers will be eyed as markets try to seek direction. Of particular interest are likely to be speeches from Fed members Rosengren, Clarida and Kaplan throughout the day, with market participants likely to parse remarks thoroughly for comments relating to the policy outlook. Also due to speak is the Bank of Canada’s Lane, with comments relating to Friday’s bumper jobs report likely to be of most interest. 

Looking ahead to the remainder of the week, the data calendar is relatively busy. Most attention is likely to fall on employment reports from the UK (Tuesday) and Australia (Thursday). From the UK, markets will be looking for the labour market to remain tight, with wages increases set to remain close to post-crisis highs. Meanwhile, from Australia, markets will look to the employment report to try and second-guess the RBA’s next policy move, with an upward trend in unemployment likely to increase pressure on the central bank to cut rates. Other focuses include the 2nd estimate of first quarter GDP from the eurozone (Weds), retail sales (Weds) and consumer sentiment (Fri) figures from the US as well as the latest inflation numbers from Canada (Weds). Finally, on Saturday, Australia will head to the polls in Federal Elections, with current opinion polling showing the country likely to elect their 8th Prime Minister in the last decade.

Today's Economic Calendar

Time Currency Release Consensus Previous
2:05pm USD Fed's Rosengren & Clarida Speeches
6:20pm USD Fed's Kaplan speech
11:45pm NZD Net Migration (y/y - Mar) 3.3% -1.3%