Global Themes

GBP/USD slide to continue? The week ahead 
- Sterling falls to new lows 
- Dollar demand continues to swell
- Data unlikely to lift Euro this week

GBP

Sterling falls to new lows
Sterling fell to its lowest point this year against the US Dollar this morning.

GBP/USD finally broke through the pivotal level of $1.3450 to as low as $1.3412. Market participants have officially wiped out all gains seen in GBP/USD for 2018 and could extend the pair’s losses with the potential for GBP/USD to head back to the $1.33 handle in the short term. Confusion over whether the UK will remain in the customs union past the current transitional period has hurt the pound, more so against the dollar than the Euro. GBP/EUR continues to trade sideways this morning around €1.1437. Despite the recent slow moves in GBP/EUR, the pair trades over 120 pips higher than the start of last week.

Looking ahead, a major concern for traders continues to be the fact that traders continue to keep pricing out an interest rate hike from the Bank of England (BOE). Prior to BOE Governor Mark Carney’s words in April, which sent Sterling spiralling lower, there were some speculators who hinted at the possibility of the central bank raising interest rates twice in 2018. However, the playing field has changed with some analysts not even pricing in one rate hike by the end of 2018 (source: Reuters). This sentiment could certainly continue should economic data fail to impress this week.

The UK economic docket will commence on Wednesday with the UK Inflation number out at 9:30am. The inflation number is expected to rise to 0.5% m/m in April from 0.1% previously; however, should recent price changes in oil be factored in the move could be greater. Retail sales will be released on Thursday morning and the data is expected to rise to 0.7% from -1.2% m/m. However, the annual y/y rate is expected to fall to 0.1% from 1.1%. Revisions to the UK’s Q1 GDP figure will wrap up the week on Friday.

USD

Dollar demand continues to swell
Over the weekend, the US and China agreed not to engage in a trade war.

This helped the dollar index, which tracks the strength of the USD against a basket of currencies, climb to a fresh 5-month peak of 93.91. The easing tensions between the world’s two biggest economies favours risk on trader sentiment, meaning safe-haven currencies like the Japanese Yen are subject to selling pressure as investors move into riskier higher yielding currencies. The sought-after US Dollar continues to drive markets, clocking a 5-week winning streak against both Sterling and the Euro. EUR/USD has plunged over 5% during this period and has touched new 2018 lows of $1.1729 this morning. The $1.17 mark should offer some support to the pair but if demand for the dollar continues to rise, then EUR/USD could slide towards $1.16 before the week is up.

This week market participants will keep an eye on tomorrow’s meeting between South-Korean president Moon Jae-in with US President Donald Trump to prepare for the upcoming summit in June between US and North Korea. With minimal economic data releases from the US this week, the other main focus will be the Federal Reserve’s (Fed) minutes of its May meeting. Policymakers left rates unchanged at that meeting, but investors will be scrutinising the minutes for any further guidance on the future path of rate rises.

A second rate rise from the Fed this year is expected in June, and a third before year-end is largely priced into markets. However, if the language or tone from the minutes reveals scope to raising rates up to four times this year, the recent surge in the dollar should likely pick up pace and potentially put EUR/USD and GBP/USD under significant downside risk. 

EUR

Data unlikely to lift Euro this week
Sentiment favouring the US Dollar over the Euro is unlikely to change today, with trading in the Eurozone (EZ) set to be limited, with bank holidays in Germany and France.

The first major piece of news from Europe will be tomorrow when the Foreign Affairs Council (FAC), a division of the European Council, meets to discuss the proposed tariffs from the US. At the moment, goods from the European Union (EU) are excluded from the tariffs until the 1st of June, but the EU has been pushing for a long term agreement from President Donald Trump to keep EU goods from faces levies. In other political news, on Thursday France and Russia meet, with the Iran nuclear deal and Syria likely to be the main topics while Germany meets China where US tariffs top the agenda.

PMI manufacturing and services industry data is released for France, Germany and for the overall Eurozone number on Wednesday. Europe’s composite release for May is expected to have fallen to 54.9 from April’s figure off 55.1.

The minutes from the last European Central Bank (ECB) meeting in April are released on Thursday. If the Euro is to reverse the recent trend of losses then investors will need to see that at least some members of the ECB are hoping to bring stimulus to an end this year and are planning for a future interest rate rise. This seems unlikely at this present time though, given recent inflation and GDP figures. Revised Q1 German GDP figures are released on the same day, and the headline rate is expected unchanged at 0.3% q/q.




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