FX Markets Remain in a Slumber

Now-familiar trade tensions and political uncertainties keep market participants on the sidelines and volatility muted.

Previous Day's Market Highlights

FX markets continued to trade in a relatively subdued manner on Thursday as the now-familiar narrative of increasing trade tensions remained front and centre. However, not only are markets continuing to focus on the escalating US-China spat, concerns are now emanating from President Trump’s plan to impose a 5% tariff on Mexican imports over border security concerns - likely to further strain US-Mexico relations. Escalating geopolitical risks once again saw safe-haven currencies well supported, with both the yen and Swiss franc gaining ground, while the typically risk-sensitive Aussie and Kiwi dollars both shed 0.2%. The dollar was also underpinned, nearing a 2-year high against a basket of peers, with support stemming from both haven and month-end demand. Markets largely shrugged off a downward revision to 1st quarter GDP, with economic growth now marked at 3.1% on an annualised quarter-on-quarter basis. Other US data was mixed, with weekly jobless claims hitting a 4-week high and pending home sales sliding by 1.5% last month. 

Meanwhile, the pound lost ground as ongoing political uncertainties kept market participants on the sidelines. Sterling slid 0.3% against the dollar, below the key $1.26 support level, to record a fresh 4-month low. Against the single currency, sterling slid for the 1st day in 3, losing 0.2%. The euro traded largely unchanged across the board, with a lack of major economic releases to stimulate volatility.  

Overnight, Chinese economic data has disappointed, with official PMI surveys showing the manufacturing sector contracted in May for the first time in 3 months. Manufacturing slid to a below-forecast 49.4, while PMI for the services sector also disappointed, falling to a sub-forecast 54.3. These data points not only show how escalating trade tensions may be having a detrimental impact on the Chinese economy, but also give a warning sign over the outlook for the Australian and New Zealand economies - large trading partners of China. Also released overnight was a host of economic data from Japan, which showed industrial production surprisingly increasing by 1.1% in April. This positive release, combined with as expected unemployment and CPI figures, has seen the yen gain 0.6% in early trading. 

Away from FX, equity markets were mixed, with continued geopolitical concerns weighing. In Europe, the Stoxx 600 gained 0.4%, while London’s FTSE 100 added 0.5%, the latter helped by a weaker pound. Across the pond, the US benchmark S&P 500 closed marginally lower, losing 0.1%. Finally, oil prices fell to a 2-month low as continued trade concerns and a smaller than expected stockpile draw exerted downward pressure. Global benchmark Brent lost 3.95%, while US WTI crude shed 3.6%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1320 1.1681 1.1298 3.28%
GBP/USD 1.2605 1.3080 1.2580 3.82%
EUR/USD 1.1135 1.1263 1.1107 1.39%
GBP/AUD 1.8230 1.8882 1.8195 3.64%
GBP/NZD 1.9360 2.0021 1.9306 3.57%
GBP/CAD 1.7065 1.7728 1.6902 4.66%

Today's Market Highlights

The data calendar is relatively busy to conclude the week, with focus set to fall on a host of North American releases this afternoon. Likely of most interest to markets will be April’s PCE figures, the Fed’s preferred gauge of inflation. Expectations are for the core PCE index to increase by 1.6% on a year-on-year basis, unchanged from March’s release. While the Fed described benign inflation in the first quarter as transitory, a continued trend of below-target price increases will likely further increase the odds of a rate cut by year-end, with markets currently pricing an 89% chance of a 25bps cut by December. Also of note from the US this afternoon will be final consumer sentiment figures from the University of Michigan, where markets expect a downward revision to 101.0, though this still represents a resilient US consumer. Markets will also pay attention to speeches from the Fed’s Bostic and Williams this afternoon for any hints of future monetary policy tweaks. 

Meanwhile, from Canada, markets will chew over 1st quarter GDP figures from Canada. Expectations are for the economy to have grown at 1.2% on an annualised, quarter-on-quarter basis, well above the 0.4% growth recorded in the final quarter of last year. Recent firm economic data, combined with an improvement in sentiment, have increased expectations that Canada’s soft patch in Q1 was not as bad as feared in some circles. Elsewhere, data is limited, with no major releases due from the UK, with focus set to remain on political developments. From the eurozone, German inflation figures for May will be eyed, with HICP set to retreat back below 2%, with last month’s rise largely due to Easter seasonality. 

Looking ahead to next week, June begins with a busy data calendar including monetary policy decisions from Australia and the eurozone. Markets have now fully priced in an RBA rate cut next week, hence increased attention will be on the tone of the RBA’s statement and whether further hikes are on the horizon. For the ECB, no policy changes are expected, though markets will chew over a revised set of economic forecasts, likely to reflect a relatively subdued economic recovery in the eurozone. Elsewhere, focus will fall on the usual monthly set of PMI surveys, in addition to Friday’s labour market reports from the US and Canada, the former including the headline-grabbing nonfarm payrolls figure.

Today's Economic Calendar

Time Currency Release Consensus Previous
1:00pm EUR German HICP (y/y - May) 1.4% 2.1%
1:30pm USD PCE Price Index (y/y - Apr) 1.6% 1.5%
1:30pm USD Core PCE Price Index (y/y - Apr) 1.6% 1.6%
1:30pm CAD GDP (Q1 - q/q annualised) 1.2% 0.4%
3:00pm USD Final University of Michigan Consumer Sentiment Index 101.0 102.4