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Currency Market Analysis

May 16, 2019 | Currency Market Analysis

Global Themes

Pound plunges to 3-month lows
View our Brexit Scenario Guide  here

- Sterling sinks under Brexit pressure
- Trump tariffs delay jolts markets
- Aussie down, under pressure

GBP

Sterling sinks under Brexit pressure
Sterling accelerated lower yesterday amidst rising UK political dysfunction related to Brexit anxiety. Prime Minister Theresa May’s Brexit Withdrawal Agreement is expected to fail for a fourth time when brought back to Parliament in June as the Labour party said they cannot support a legislation to ratify the PM’s Brexit deal if an agreement has not been reached.

Cross-party Brexit talks have been in the shadows for weeks now and a compromise has still not been reached, yet the PM plans to bring her Brexit deal back to the table. UK lawmakers vented their frustration in another heated parliamentary debate, which punished the pound. Brexit pessimism is increasing as the fear of a no-deal scenario playing out filters back into financial markets. Market participants sold the pound across the board and GBP/USD fell to a fresh 3-month low near $1.28 before retracing higher on profit taking. GBP/EUR fell beneath €1.15 for the first time since March, stamping its eighth daily decline in a row. It is the worst daily run for GBP/EUR since the financial crisis in 2008. The currency pair is now down nearly 3% since May’s high just shy of €1.18.

Failure to pass her Brexit deal in June and a poor performance by the Conservative party in the EU elections will surely see the PM finally step down. This may open the door to a potentially Eurosceptic Prime Minister, raising the chance of a no-deal Brexit, which is likely to send Sterling tumbling. Ms May meets with the Conservative party backbenchers of the 1922 committee today to discuss the date of her departure.

USD

Trump tariffs delay jolts markets
News that US President Donald Trump plans to delay tariffs on car imports gave a boost to risk sentiment and the Euro jumped higher yesterday. EUR/USD fell to 1-week lows of $1.1175 before bouncing back into the mid-$1.12 region following the announcement. GBP/EUR sank closer towards the €1.14 handle amid Euro strength and Brexit woes weakening the pound.

Mr Trump is reluctant to spark up another trade war dispute with the European Union for now, which has prompted a wave of risk appetite across financial markets. The US-China trade war still hangs over markets, a headache for risk averse investors, and capping any significant gains for riskier emerging market currencies and those currencies linked with China such as the Australian Dollar. Nevertheless, both the stock and currency markets cheered the positive comments, staging an impressive turnaround after being rocked by growing geo-political and trade tensions of late.

Today, risk-off sentiment appears to be back on the cards as the safe-haven Japanese Yen remains in high demand. Investors remain cautious and any trade-related headlines will be closely monitored. The currency market is ever more exposed to erratic and unforeseen price action due to its sensitivity to the more frequent political news flow.

AUD

Aussie down, under pressure
Amidst such turbulent market conditions driven chiefly by risk-on/risk-off sentiment, the Australian Dollar has been at the forefront of volatility. The Australian economy is almost tied at the hip to China, and therefore the Aussie dollar is often seen as a proxy for Chinese growth. Poor macroeconomic data from China this week and rising trade tensions between the US and China thus continues to weigh on the dollar.

The impact on the Australian economy is beginning to shine through now too. This morning, a bigger-than-expected rise in the unemployment rate is unnerving investors and AUD is falling. The Reserve Bank of Australia (RBA) has previously stated the importance of the labour market conditions when making monetary policy decisions, so the surge in unemployment to an 8-month high in April does not bode well. Money markets are now pricing in a 45% chance of the RBA cutting interest rates in June, which would prompt further Aussie weakness.

GBP/AUD spiked to post-EU-referendum highs around A$1.89 earlier this month. The currency pair has fallen around three cents since but is up over 0.2% this morning and may gain further traction if the Aussie sell-off continues.


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