Global Themes

  • Risky market conditions boost USD
  • Turkey turmoil spells Euro trouble
  • UK data to help stabilise Sterling?

USD

Risky market conditions boost USD 

The big news washing over markets is the rising tensions between the US and Turkey and the knock-on-effects this is having across many currencies. US President Donald Trump increased hostility on Friday by piling on more pressure, doubling tariffs on imported steel and aluminium to 50% and 20% respectively. Turkey’s President Recep Tayyip Erdogan made a strong speech on Friday instructing people to sell their foreign currency and gold and buy the Turkish Lira to help support and strengthen the local currency and hopefully the economy. However, the lira’s free fall continued, which is now over 75% down this year against the USD. The European Central Bank (ECB) became alarmed about the eurozone’s banks’ exposure to the lira and this concern saw the Euro then weaken significantly against the dollar dragging EUR/USD to fresh 13-month lows.

It’s a thin schedule on the US economic calendar this week, with retail sales and industrial production data on Wednesday the only notable releases. Attention will remain on the Turkey crisis and for any new communique that could pave the way for further dollar buying. The US Dollar index, which measures the strength of the dollar against a basket of currencies, is up at levels not traded since July 2017.

  •  The USD is benefiting from the risk-off market sentiment and could challenge for a 4th consecutive week of gains against the Euro, should this trend continue this week.

EUR

Turkey turmoil spells Euro trouble 

The Euro has suffered in the face of the risk-off market sentiment thanks to the overwhelming Turkey crisis. The Turkish lira dropped to all-time lows against multiple currencies and due to the complexity and interdependency of financial markets, the ECB’s concern that eurozone banks in Spain, Italy and France could face troubling times due to their exposure to Turkey’s woes. Investors’ appetite to buy the Euro is consequently waning and EUR/USD continues to experience downside pressure trying to hold on to the €1.14 handle this morning.

Data from the eurozone this week includes Q2 GDP from the bloc, German ZEW surveys and industrial production all released on Tuesday morning. The Eurozone’s July inflation figure is also revealed on Friday morning, which could help support the fragile single currency as the annualised figure is expected at 2.1%, a tick higher the June’s 2%.

  • Despite the important data releases, the banking contagion effect of Turkey’s turmoil will remain the big story and likely influence the Euro’s direction. Any European banks that have either lent to Turkish businesses or taken on Turkish subsidiary banks could be at risk themselves and the Euro could continue to depreciate as a result.

GBP

UK data to help stabilise Sterling? 

This week we have the usual run of UK economic data in the format of inflation, average earnings and unemployment. The releases start tomorrow morning at 9:30am where we kick off with UK unemployment and average earnings. Both sets of data are forecast to be unchanged for the period of June at 4.2% and 2.7% respectively. UK inflation will be released on Wednesday and retails sales on Thursday.

Last Friday, UK Preliminary GDP came in line with forecast at 0.4% for Q2, which helped buoy Sterling for a spell. However, the terrible week endured by the British Pound has left GBP/USD trading this morning in the mid $1.27 range. GBP/EUR has rallied higher but again struggles to hold above the €1.12 handle. However, rather than Sterling strength, the main reason for this pair driving higher is that the Euro is being aggressively sold due to the risk sentiment being felt in the eurozone because of Turkey’s currency depreciating.

  • GBP/USD has notched five consecutive weeks of declines, falling close to 5% over that period. The last time Sterling lost on such a consecutive basis was during the December- Jan period between 2014/15 in the build up to the last general election. With the fall being so aggressive some analysts are now forecasting the $1.25 region as the next level of psychological support. GBP/EUR will continue to be steered by EUR/USD and with many global geo-political events dictating this, we could expect short term volatility to remain, despite UK Government summer recess still in play.



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