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Currency Market Analysis

May 20, 2019 | Currency Market Analysis

Global Themes

Prepare for European elections; the week ahead

The economic data calendar appears relatively quiet this week, until Wednesday when we see UK inflation and Canadian retail sales data published, followed by the minutes of the Federal Reserve’s (Fed) monetary policy meeting held earlier in the month. Detailed German Q1 GDP results drop in on Thursday alongside Eurozone PMIs and the European Central Bank’s (ECB) meeting minutes, which should drive Euro demand. Thursday through to Sunday are the highly anticipated European Elections and Friday hosts UK retail sales data. As ever, US-China trade talks and Brexit-related updates will keep market participants on their toes.

View our Brexit Scenario Guide  here
- Brexit-bruised Sterling eyes European election
- Euro downside risk swells
- US Dollar continues its ascent
- Aussie dollar gaps higher
- CAD buoyed by oil rally

GBP

Brexit-bruised Sterling eyes European election
Brexit talks between the Conservative party and Labour party came to an unsuccessful conclusion last week and pressure is building on Prime Minister Theresa May to step down. The pound has fallen relentlessly against most major currencies, enduring its longest daily losing streak since the turn of the century versus the Euro.

Attention now turns to the European Parliament election that takes place on Thursday through to Sunday, with some calling it a proxy second EU-referendum. The structure of the EU is at risk with far-right populist parties on the rise, hoping to destabilise the institution from the inside. This could rock the currency market, potentially weakening the Euro significantly. The pound could also take a hit if the Brexit Party dominate as expected, due to its stance on exiting the EU without a deal. A poor result for the Conservatives may also ramp up the pressure on the PM to quit sooner. Increasing political uncertainty and turbulence is forecast to send Sterling further south. If GBP/USD falls below $1.27, an accelerated slide towards $1.26 could occur. GBP/EUR looks well supported at €1.14, although it opened the week below this level for the first time since January this year.

UK inflation and retail sales data on Wednesday and Friday respectively will also be important to watch, but economic data has been brushed off by Sterling traders recently with closer attention paid to the Brexit situation. 

EUR

Euro downside risk swells
Aside from the European election, it’s a busy week of Eurozone data releases. Despite GDP growth confirmed at 0.4% last week, reducing recession fears in Germany, investors are still wary of a dwindling Eurozone economy. Tepid growth, amid weak global demand and political uncertainty, continues to weigh on the Euro. EUR/USD, the most traded currency pair in the world, is lingering near 2019 lows and may extend its slide to below $1.11 this week.

Thursday is the critical data day and the European Central Bank (ECB) releases the minutes of its latest monetary policy meeting. PMI readings are due with manufacturing particularly in the spotlight. This sector has fallen into contraction territory, declining for eight months straight and posing a threat to a sustained economic recovery. Traders betting on a stronger Euro will hope this PMI reading improves, as will ECB policymakers who have recently pushed back the timing of a rate hike due to lacklustre growth and inflation.

After its steep descent from near €1.18 to under €1.14 in just ten days, GBP/EUR may look to claw back some losses this week. However, even if the Euro does weaken, negative Brexit and political developments from the UK will likely supersede and potentially drag the currency pair even lower.

USD

US Dollar continues its ascent
Amidst rising US-China trade tensions, the so-called “safe-haven” but also high yielding US Dollar has benefited from increased demand. The US Dollar index, measuring the strength of the dollar against a basket of currencies, has climbed six days straight and approaching multi-year highs.

Market participants will pay close attention to any updates on trade uncertainty or news in relation to the US-Iran conflict, which is unnerving investors. The rising threat of a war breaking out could fuel further demand for the dollar, increase oil prices and see riskier emerging market currencies depreciate rapidly. Sterling is trading ever more like an emerging market currency due to its sensitivity to unpredictable political news, therefore in times of heightened risk and uncertainty, Sterling becomes more vulnerable to aggressive selling pressure.

Also on the radar this week is the minutes from the Fed’s recent monetary policy meeting. The minutes will be published on Wednesday evening at 7:00pm and may provide more insight into the timing of the next Fed rate hike or even rate cut, which could jolt markets. 

AUD

Aussie dollar gaps higher
A surprise victory by Australia’s conservative government has sent the Aussie Dollar charging higher, also helped by an improvement in risk appetite. GBP/AUD gapped lower on Monday due to jump in AUD demand. Having closed Friday trading above A$1.85, GBP/AUD opened up the new week below A$1.84.

Analysts deem the election result as a positive for economic stability due to the business-friendly policies expected by the centre-right Liberal National Coalition. The improvement in risk appetite came from China’s central bank confirming it would maintain the stability of its currency amid the rising US-China trade tensions. The Chinese Yuan has suffered in the wake of the escalating trade tensions and this has weighed on the Aussie of late, due to its close economic ties.

CAD

CAD buoyed by oil rally
The Canadian Dollar has also opened the new week on the offensive thanks to a surge in oil prices to multi-week highs. GBP/CAD has endured a 2-week decline of nearly 4% and is under attack once again this morning. The currency pair is floating under C$1.71 and may look to test sub-C$1.70.

The Organisation of the Petroleum Exporting Countries (OPEC) and other oil producers indicated oil production cuts will be maintained to drive down crude inventories. A reduction in supply has seen oil prices climb higher since the start of the year and has help boost the value of currencies of oil-exporting nations like the Canadian Dollar and the Norwegian Krone.


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