Tariff Man Strikes Again

President Trump's threat of tariffs on Mexican imports further dents risk appetite as June begins with a busy slate of economic releases.

Previous Day's Market Highlights

Already risk-averse markets were further spooked on Friday after President Trump's announcement that tariffs would be imposed on all Mexican imports, citing border security concerns as the rationale for the decision. However, the President now using tariffs as a diplomatic bargaining chip concerned markets, sparking further significant demand for safe-haven currencies as fears grew further tariffs would be a catalyst for slower global growth. The yen and Swiss franc remained well-supported, the former gaining almost 1% against the dollar to reach its strongest levels since January. For the dollar, markets largely ignored the greenback's safe-haven status, instead expressing concerns over the impact that increasing tariffs and trade tensions will have on the US economy. The dollar fell 0.5% on Friday, hitting a 1-week low against a basket of peers, with another benign inflation print also dampening demand. Data showed April's core PCE price index, the Fed's preferred inflation measure, rising by just 1.6% on a year-on-year basis, significantly below the Fed's 2% target - raising concerns that Q1's subdued inflation may not be "transitory". Markets now assign a 95% chance of a 25bps rate cut from the Fed by year-end, with two rate cuts a 70% chance. 

Elsewhere in North America, the Canadian dollar declined by 0.3%, with the loonie pressured by a slide in oil prices along with lacklustre first quarter GDP growth. Data showed the Canadian economy growing by just 0.4% on an annualised quarter-on-quarter basis at the start of 2019, well below expectations and the weakest back-to-back quarters since 2015. However, some good news was to be found in growth figures for March, with expansion of 0.5% showing increasing growth momentum heading into the second quarter. 

Meanwhile, the pound continued to be weighed down by political uncertainties, falling to a fresh 5-month low against both the dollar and euro. Sterling did recover some ground, closing up 0.15% against the dollar, due to dollar weakness, but falling 0.2% against the single currency. However, despite muted trading on Friday, sterling chalked up a 4th consecutive weekly loss, losing 0.5% against both the dollar and euro. The single currency benefitted from a weaker dollar, adding 0.2% despite weaker than expected German inflation data confirming that price increases had been temporarily inflated by Easter seasonality. 

Rotation away from riskier assets was also in evidence in other markets, with bonds rallying as equities and oil prices slipped. 10--year Treasury yields, which move inversely to price, fell to their lowest level since 2017, while gold prices rose to a 7-week high. In contrast, equity markets declined, the pan-European Stoxx 600 losing 0.8% and the US benchmark S&P 500 shedding 1.3%. Finally, oil prices also fell, as increasing trade tensions sparked concerns over supply. Brent lost 3.5% on Friday, while US WTI crude shed 5.5%, falling to the lowest level since February.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1315 1.1681 1.1267 3.54%
GBP/USD 1.2635 1.3080 1.2558 3.99%
EUR/USD 1.1165 1.1263 1.1107 1.39%
GBP/AUD 1.8195 1.8882 1.8170 3.77%
GBP/NZD 1.9300 2.0021 1.9275 3.73%
GBP/CAD 1.7065 1.7728 1.6902 4.66%

Today's Market Highlights

June begins with the release of monthly manufacturing PMI surveys from the majority of major global economies. Markets are likely to pay particular attention on the impact of increasing global trade tensions on the manufacturing sector, along with any signs of softer activity in the global economy. The releases begin with final data for May from the eurozone, expected to remain unchanged from the previously released flash estimate, with an index reading of 47.6 showing a 4th consecutive monthly contraction. Shortly after, data from the UK is expected to show a modestly slower pace of expansion, though focus for the pound remains firmly on political developments. From North America, PMI surveys from Canada and the US are due, the latter likely of more impact after falling to the lowest level since October 2016 last month. 

Also eyed today will be a smattering of Fed speakers. Markets are due to hear from Board Member Quarles, dovish voter Bullard and hawkish non-voter Barkin. Any comments on the policy outlook will likely attract significant market attention. 

Overnight, focus will shift to Australia and the Reserve Bank of Australia's (RBA) latest monetary policy decision. Rarely has a central bank policy decision been so clearly flagged, with markets pricing an 87% chance of a 25bps rate cut, bringing interest rates to a fresh record-low of 1.25%. Policy easing has become necessary due to continued below-target inflation, a lacklustre labour market and concerns over economic growth stemming from increasing global trade tensions. Of more interest to markets than the rate decision is likely to be the RBA's comments on the monetary policy outlook, with Tuesday's rate cut likely to herald the start of an easing cycle. Markets currently give a 50% chance of a further rate cut by August, with a 3rd rate cut by December a 40% probability. Prospects of further loosening of policy will likely exert further pressure on the Aussie dollar. 

Looking to the week ahead, the calendar remains busy with central bank policy, economic data and ongoing geopolitical concerns set to drive volatility. Firstly, turning to monetary policy, markets will be looking to Thursday's ECB meeting, where rates will be kept on hold, for a gauge of policymakers expectations for the eurozone's economy in the second half of the year. Also in focus will be a speech from Fed Chair Powell (Tues), where markets will likely look for the door to be opened to a rate cut later this year. Moving to economic data, focus will fall on flash CPI figures from the eurozone (Tues), likely to show a slower pace of price increases as the effects of Easter fade, in addition to global services PMI surveys and 1st quarter GDP from Australia. Furthermore, Friday's labour market reports from Canada and the US, the latter including the headline nonfarm payrolls figure, will also attract significant attention. Finally, ongoing trade tensions and UK political uncertainties show no sign of abating.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR Manufacturing PMI (Final - May) 47.7 47.7
9:30am GBP Manufacturing PMI (May) 52.4 53.1
2:30pm CAD Manufacturing PMI (May) 49.8 49.7
3:00pm USD ISM Manufacturing PMI (May) 53.3 52.8
5:30am (Tues) AUD Reserve Bank of Australia Rate Decision & Statement 1.25% 1.50%