Trade Tensions Spark Risk-Off Moves

Escalating trade tensions spark a rotation out of riskier assets, seeing safe-haven currencies find demand ahead of today's busy calendar.

Previous Day's Market Highlights

Markets began the week in jittery fashion, with concerns over deteriorating US-China trade relations sparking a flight to safety and a move away from riskier assets. Concerns had already been present last week, when Chinese negotiators left the US without a deal, and President Trump increased tariffs on almost half of Chinese imports. As expected, China announced retaliatory measures on Monday, copying the US by increasing tariffs to 25% on nearly 2500 US goods from 1st June, while reiterating their hopes that the US will return to bilateral trade talks. With a deal now looking further away than ever, despite looking close just 2 weeks ago, risk sentiment has significantly soured. The decreasing risk appetite has benefitted safe-havens, with both the yen and Swiss franc gaining ground on Monday, adding more than 0.6% each. Meanwhile, the Aussie dollar, often seen as a risk proxy, declined by more than 0.75%, with the slide worsened by the close trading relationship between Australia and China. Other commodity currencies, the Canadian and New Zealand dollars, also lost ground. 
Elsewhere, market moves were relatively limited with an absence of major economic releases in G10 FX - barring 1st quarter Norwegian GDP showing the fastest pace of growth in 3 quarters. The pound lost ground, likely as concerns over a lack of a breakthrough in Brexit talks continued to exert pressure. Sterling traded 0.25% lower against both the dollar and euro, reaching a 2-week low against the former and experiencing a 6th consecutive daily decline against the latter, the worst run since late-September 2017. The single currency gained across the board, chalking up a 4th straight daily gain against the dollar as the greenback weakened as inflows into US markets declined on trade-related concerns. The dollar lost almost 0.25% against a basket of peers over the course of the day. 
In other markets, equity indices in both Europe and the US declined as part of a broader rotation away from riskier assets. In Europe, the pan-continental Stoxx 600 lost 1.2%, while the US benchmark S&P 500 shed nearly 2.5% - one of the worst trading days this year. Finally, oil prices shed early gains to settle largely unchanged as supply concerns caused by a tanker collision in the Middle East were offset by concerns over decreasing demand due to US-China trade tensions. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1525 1.1776 1.1512 2.24%
GBP/USD 1.2950 1.3176 1.2866 2.35%
EUR/USD 1.1240 1.1265 1.1110 1.38%
GBP/AUD 1.8625 1.8882 1.8093 4.18%
GBP/NZD 1.9672 2.0021 1.9242 3.89%
GBP/CAD 1.7440 1.7728 1.7300 2.41%

Today's Market Highlights

Today’s data calendar is relatively busy, however focus is likely to remain squarely on the two major ongoing geopolitical issues - namely Brexit and US-China trade tensions. Markets are likely to latch on to any headlines stemming from either story, with safe-haven flows likely to increase should risk sentiment sour further, with the yen and Swiss franc likely to remain relatively well-supported. 
Turning to economic data, the main highlight will be this morning’s UK labour market report, with data expected to show the jobs market remaining as one of the few bright spots of the UK economy. Average earnings, including bonuses, are expected to have increased at 3.4% on a 3-months-on-year basis in March, a slight pullback from the previous release though remaining close to a post-crisis high and providing further evidence of a tight labour market. Unemployment figures are also likely to reinforce this fact, with the unemployment rate set to remain at a 4-decade low 3.9% for a 3rd consecutive month. Resillient labour market data may see sterling find some short-term support, though is unlikely to alter the long-term outlook for the pound or the Bank of England’s monetary policy, with both highly dependent on the outcome of Brexit despite the increase in inflationary pressures caused by rising wages. 
Elsewhere, from the eurozone, markets will be focusing on economic sentiment figures, with data from Germany likely the most impactful. Figures from ZEW are set to show German economic sentiment increasing by 2 index points to 5.0, a level which would be the highest in more than a year, though sentiment for the eurozone as a whole is expected to decline. Markets will also keep an eye on industrial production figures, expected to decline at 0.3% on a month-on-month basis, with both releases being used as a gauge of the eurozone’s recent economic soft patch. 
From the US, data is relatively limited with only import and export price index figures of note - neither typically of great interest to markets. Focus will instead lie with a couple of Fed speakers, with voting member George and non-voter Daly due this afternoon where markets will be looking for the Fed’s message to remain one of “patience” when determining future interest rate changes.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Average Earnings - Inc. Bonus (3m/y - Mar) 3.4% 3.5%
9:30am GBP Unemployment Rate (Mar) 3.9% 3.9%
9:30am GBP Claimant Change (Apr) 24.2k 28.3k
10:00am EUR German ZEW Economic Sentiment 5.0 3.1
10:00am EUR Industrial Production (m/m - Mar) -0.3% -0.2%