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Currency Market Analysis

May 24, 2019 | Currency Market Analysis

Global Themes

Sterling sighs at May's exit news
- Theresa May resigns
- UK retail sales may be ignored
- Dollar soars to 2-year peaks before retracing

- Euro jumps higher despite poor economic data

Theresa May resigns, Sterling sighs
As expected, Theresa May has announced her resignation after failing to deliver Brexit. Ms May will stand down as Conservative leader on Friday June 07, clearing the stage for a new prime minister to take the reins. It came as no surprise, hence Sterling remains relatively stable near 4-month lows.

A Conservative leadership contest will follow, throwing the UK into yet more political uncertainty over the summer, in which Sterling volatility may elevate. Many forecasters are beginning to raise the probability of a “no deal” Brexit playing out, as the replacement PM could well be a hard-line Brexiteer. The increase in no-deal Brexit odds has historically caused Sterling weakness, echoed this time round by the seemingly inexorable slide in GBP/EUR. The pound has now suffered a sequence of 14 daily declines versus the Euro.

GBP/USD has rebounded off fresh 20-week lows, thanks to dollar weakness, but is poised to clock a third successive weekly decline and is currently down 4.5% from this month’s high of $1.3176. The 2019 low sits near $1.24, which could easily be tested again if hard Brexit fears escalate.

GBP

UK retail sales may be ignored
UK inflation data this week showed prices rose at their fastest pace all year in April yet failed to move the pound. Retail sales in April are expected to have slowed, which could aggravate the pound’s relentless slide, though don’t bet big on any major moves.

UK economic indicators have been largely overlooked by currency traders, with the pound stuck in limbo, fragile in the face of Brexit, but unreceptive when it comes to data. Retail sales in the UK climbed 6.7% from a year earlier in March 2019, its sharpest rise since October 2016. The figures for April, released at 9:30am aren’t looking quite so rosy, with the month on month number expected to show a fall of 0.3% and the annualised number slowing to 4.6%.

Sterling traders may just shrug it off though, leaving the UK currency exposed and vulnerable to Brexit developments and more political drama to potentially unfold.

USD

Dollar soars to 2-year peaks before retracing
The risk-off mood continues to swell and safe-haven demand is flying. The Japanese Yen, Swiss Franc and US Dollar in particular are all in high demand. However, abysmal US manufacturing activity has halted the dollar’s climb.

The ongoing US-China trade spat continues to unnerve investors, increasing demand for the high-yielding but safer US Dollar. The dollar climbed to fresh 2-year highs against a basket of currencies including the Euro, which nearly brushed the €1.11 handle yesterday. The currency pair has since climbed back towards $1.12, helped by US manufacturing growth slumping to 9-year lows. Despite the poor data, dollar sentiment should remain firm amidst rising trade and political tensions and a stormy global economy. Riskier currencies including Sterling are being sold as a result. Downward pressure intensifies on the Antipodean Australian and New Zealand dollars and on risky emerging market currencies like the CNY and ZAR.

Sterling, also likened to an emerging market currency due to its extreme sensitivity to political news, is suffering in this risk averse market environment too. In four weeks, GBP/JPY has sunk 3.8%, GBP/CHF has fallen 3.5% and GBP/USD and GBP/EUR are both down over 2%.

EUR

Euro jumps higher despite poor economic data
Optimism across the global economy is waning and the Eurozone is certainly suffering. Activity in Germany’s services and manufacturing sectors fell in May, a consequence of the escalating trade disputes. EUR/USD tested the $1.11 handle as result but has recouped its losses following weaker US data.

Despite the pullback in EUR/USD, traders will remain wary of the struggles in the single currency area. There were hopes the economic conditions in Europe were improving, but alike the German economy, the bloc as a whole saw manufacturing contract in the month of May. Policymakers at the European Central Bank (ECB) will surely be concerned as these results are often a good reflection on GDP growth as whole. To support the slowing economy and fuel growth and inflation, further stimulus measures may be needed by the ECB, which should in theory weaken the Euro.

It’s worth noting though, that despite the disappointing round of Eurozone PMIs, GBP/EUR remains hovering near 4-month lows, on the brink of falling through to the €1.12 region. As repeatedly mentioned, ongoing Brexit and political pressures continue to weigh on Sterling, overshadowing any global economic data it seems.


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