Tentative Turnaround

Cautiously upbeat PMI figures see the euro firm, while the dollar's decline continues on further dovish Fed rhetoric.

Previous Day's Market Highlights

The euro firmed on Friday as June's PMI survey painted a relatively upbeat picture, though continued to show significant divergence between the services and manufacturing sectors. Data showed the former on track to expand at the fastest rate since November this month, with the PMI increasing to 53.4. However, despite the strong services sector, the manufacturing industry continues to contract for a 5th straight month. Manufacturing PMI did rise to a 2-month high of 47.8, though remains well-below the key 50 boundary between expansion and contraction. Markets interpreted the PMI figures as a positive sign as, despite growth momentum across the eurozone remaining weak, the bloc does not yet seem to be heading closer to recession. However, the survey is unlikely to change the ECB's view that additional stimulus may soon be required, with continued weakness in the manufacturing sector providing cause for concern. The upbeat data helped the euro on Friday, with the single currency gaining 0.7% against a weaker dollar, rising to its best levels since mid-March.

Elsewhere, the dollar continued to weaken, falling 0.5% to its lowest levels since March against a basket of peers as focus remained on the prospects of policy easing from the Fed. While markets continued to digest Wednesday's dovish policy statement, a number of policymakers affirmed the likelihood of looser policy on the horizon. Vice Chair Clarida commented that the FOMC broadly agrees the case for looser policy has increased, while re-affirming that the Fed will "act as appropriate" to sustain economic expansion. In addition, board member Brainard emphasised the downside risks weighing on the US economy, while uber-dovish non-voter Kashkari laid out his reasoning for proposing an immediate 50bps rate cut at Wednesday's FOMC meeting. 

Meanwhile, sterling held steady on Friday, with little in the way of political headlines or economic data keeping the pound confined to its recent trading ranges. Sterling chalked up a 3rd consecutive daily gain against the dollar, adding 0.3% as the greenback continued to weaken. In contrast, against the euro, the pound dipped 0.4%, recording a 7th straight weekly loss as a result of the euro's broad strength. Friday's only other notable data point was April retail sales figures from Canada. Both the headline and core (ex autos) measures fell to their lowest levels since January, recording an increase of just 0.1% on a month-on-month basis. The loonie shed 0.2% after the below-forecast release. Both the Aussie and Kiwi dollars were quiet as the week concluded, trading flat over the course of the day. 

Away from FX, equity markets dipped on Friday, though still recorded weekly gains as the prospects of looser monetary policy increased. In Europe, the pan-continental Stoxx 600 lost 0.35%, while the US benchmark S&P 500 lost 0.1% on Friday, but recorded a gain of more than 2% for the week. Finally, oil prices continued to firm on Friday, with both Brent and WTI adding more than 0.5%. For the week, WTI recorded a gain of more than 9%, the biggest 1-week gain since December 2016 as Middle East tensions sparked concerns over supply. Global benchmark Brent also gained for the week, adding more than 5%, the first weekly gain in over a month.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1205 1.1376 1.1141 2.07%
GBP/USD 1.2760 1.2763 1.2506 2.01%
EUR/USD 1.1380 1.1348 1.1151 1.74%
GBP/AUD 1.8340 1.8422 1.8113 1.68%
GBP/NZD 1.9290 1.9456 1.9053 2.07%
GBP/CAD 1.6825 1.7135 1.6674 2.69%

Today's Market Highlights

A fresh trading week begins with a relatively quiet economic calendar, giving market participants a chance to pause for breath after last week's hectic price action. Of primary interest to investors today will likely be the monthly German IFO business surveys, a useful leading indicator for current economic sentiment in the eurozone's largest economy. Business climate is expected to fall to an index level of 97.3, the lowest level since 2015 and extending the index's recent downtrend into a 4th consecutive month. Markets will also glance over businesses' assessment of current economic conditions, set to remain largely unchanged at 100.0. Should data show a continued deterioration in sentiment, providing little evidence of an uptick in economic activity, the euro will likely weaken as the chances of ECB policy stimulus increase.

Across the pond, regional Federal Reserve economic surveys continue to be in focus after steep declines in similar measures from the New York and Philadelphia districts last week. Today sees the Chicago Fed's May activity index, expected to recover slightly to -0.37, in addition to the Dallas Fed's June manufacturing index, set to rebound from last month's 6-month low. While the indicators are of interest to markets, they are likely to be overshadowed as market participants continue to look to the prospects of looser monetary policy around the corner, with as much as 80bps worth of Fed rate cuts priced in for 2019. Meanwhile, for the pound, little in the way of data is due, hence focus is set to remain on political developments - namely the ongoing Conservative Party leadership contest. Overnight, the BoJ release minutes from their June policy meeting, with markets likely to look for any hints of further policy easing on the horizon due to the significant global downside risks facing the Japanese economy. 

Looking ahead to the remainder of the week, Friday's 2-day G20 summit will be the key driver of risk sentiment, with a planned meeting between Chinese President Xi and US President Trump the main focus. Markets will be looking for conciliatory signs in order to prevent a further escalation of trade tensions. Should such an outcome not be forthcoming, downside risks to the global economy would likely increase significantly, seeing a flight to safety in financial markets, with the yen and franc likely to benefit. 

Elsewhere, monetary policy will remain in focus, with Tuesday's speech from Fed Chair Powell of most interest to markets. Any comments on the economic and policy outlook are likely to remain on the more dovish side of the spectrum. Also eyed will be Wednesday's RBNZ policy decision, with rates expected to remain on hold, in addition to BoE policymakers' testimony to the Treasury Select Committee, reflecting on May's Inflation Report and economic forecasts. Turning to data, the calendar is busier towards the end of the week, with highlights including final Q1 GDP from the UK (Fri) and US (Thurs) in addition to eurozone CPI (Fri) and US core PCE figures (Fri), the Fed's preferred inflation gauge.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:00am EUR German IFO Business Climate (Jun) 97.3 97.9
1:30pm USD Chicago Fed National Activity Index (May) -0.37 -0.45
3:30pm USD Dallas Fed Manufacturing Index (Jun) 4.8 -5.3
12:50am (Tues) JPY BoJ Meeting Minutes