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Currency Market Analysis

May 15, 2019 | Currency Market Analysis

Global Themes

Sterling seesaws on Brexit news
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- GBP/EUR bounces off fresh 2-month low
- Eurozone GDP headlines today
- Brexit bulletin – June vote pencilled in
- GBP/USD falls under $1.29 ahead of US data
- China data disappoints

GBP

GBP/EUR bounces off fresh 2-month low
The selling bias of the British Pound continues, as GBP/EUR knocked on the door of the €1.15 floor yesterday before rebounding higher. Brexit jitters and lower UK wage growth triggered the move lower before the key support level held. This morning, GBP/EUR hovers precariously close to this level again ahead of key Eurozone data.

The unproductive cross-party Brexit talks and fears over Prime Minister Theresa May’s future continue to weigh on the pound. Yesterday’s labour market data added insult to injury for Sterling, as wage growth, including bonus, slowed to 3.2% in the first quarter of 2019, down from 3.5% and below the 3.4% forecast. There is a possibility that wage growth could continue slowing as the recent Brexit-induced stockpiling by businesses may hinder the need for more labour. Slower wage growth will not help push up inflation and therefore the Bank of England may hold off from raising interest rates for longer, which could weaken the pound further.

Suffering seven straight daily losses, GBP/EUR should find continued support at the €1.15 floor, but if Eurozone growth figures surprise higher today, this could be the catalyst to send the pair further south.

EUR

Eurozone GDP headlines today
Flash Eurozone GDP estimates for the first quarter of 2019 will be published at 10:00am today. The figures could have a strong bearing on the Euro. Since the significant deceleration in growth from Europe in the final quarter of 2018, today’s figures will likely be heavily scrutinised. Q1 GDP is forecast at 1.2% y/y and 0.4% m/m, both unchanged from the previous quarter.

This morning, data revealed that the German economy expanded by 0.4% q/q in the first quarter of 2019. After stagnant growth in the previous quarter, narrowly avoiding a recession, investors should cheer this positive news. However, the yearly growth rate slowed to 0.6% from 0.9%, and a tick lower than the expectations of 0.7% y/y.

If the growth data surprises to the upside, GBP/EUR could fall below the key €1.15 mark. However, with EUR/USD hovering above the $1.12 handle, if the data disappoints and this currency pair collapses into the $1.11 region again, this could allow GBP/EUR to scale higher.

Brexit

Brexit bulletin – June vote pencilled in
There is support for continued cross-party Brexit talks and the UK PM May is expected to launch another push to scrape her Brexit deal over the line in the first week of June. Parliament will vote for a fourth time to try and break the Brexit deadlock. Sterling cheered the news late yesterday, but optimism remains capped and Sterling is already under renewed selling pressure this morning.

Although MPs voted to take a no-deal Brexit off the table in April, the risk of this eventuality accidently playing out is limiting Sterling upside. The delayed exit date from the European Union is October 31, but PM May and UK lawmakers agree that the Brexit legislation needs to be passed before the summer parliamentary recess. However, PM May is under pressure not to give in to Labour leader Jeremy Corbyn’s demands to agree a customs union with the EU, which begs the question whether the upcoming vote will pass through Parliament.

The UK will take part in the EU elections between May 23-26 and MEPs will take their seats if a Brexit deal hasn’t been ratified before June 30. The complex political landscape and lack of progression in Brexit negotiations could fuel further Sterling weakness.

USD

GBP/USD falls under $1.29 ahead of US data
The weaker pound compounded with a stronger US Dollar is rocking GBP/USD this morning. The currency pair has dropped over 2% in seven trading days and is flirting with the $1.29 level.

Since falling through the key 200-day moving average support around $1.2960 yesterday, the slide extended quickly towards $1.29 and Sterling looks vulnerable to more downside risk, but the $1.2860 level (April low) could offer a significant support.

US retail sales data is in the spotlight this afternoon and forecast to slow in pace, which should limit GBP/USD downside risk.

China

China data disappoints
Trade tensions between the US and China have ramped up lately, roiling financial markets and sparking risk aversion. Positive rhetoric from both sides in the hope of finding a resolution has helped to calm nerves though. However, disappointing macroeconomic data from China this morning may set the tone for another risk-off day.

Chinese urban investment, industrial production and retail sales all came in below forecasts. Retail sales was a big surprise, growing at a pace of 7.2% in April, its slowest rate since 2003. China may feel a need to do more to stimulate its economy considering the escalating trade war with the US, which could fuel further risk aversion, hitting emerging market currencies and the Antipodeans.

The Australian dollar and New Zealand dollar have already come under renewed selling pressure this morning. GBP/AUD lingers above the A$1.86 handle again while GBP/NZD snaps a 7-day losing streak, rebounding off the NZ$1.96 handle and testing NZ$1.97.


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