Global Themes

Euro rallies while PM May faces showdown  
- ECB’s Praet hints at policy change 
- UK cabinet split on show again 
- Joyless June for USD?

EUR

ECB’s Praet hints at policy change
The Euro rose close to a two-week high against the US Dollar yesterday after the European Central Bank’s (ECB) chief economist Peter Praet hinted the ECB could wind down its stimulus program by the end of the year, as inflation has risen towards its target.

The ECB is seemingly unfazed at the potential political crisis in Italy, which is the region’s third-biggest economy. Yesterday, Mr Praet said the central bank would debate next week on June 14th whether to start to unwind bond purchases gradually (source: Reuters). The Euro is now over 2.5% up against the dollar in just 6 days, and back into the $1.18 level. GBP/EUR has now fallen back below €1.14.

If the ECB intends to end its quantitative easing program, this could put the Euro back in the driving seat as the most dominant currency and help the Euro reverse the 7% gain the dollar has made against it since mid-April. However, market participants may be cautious to jump straight on the Euro bandwagon given the potential Italy has to disrupt the Eurozone.

Today at 10:00am, revised GDP data for Q1 will be released, and there is no change expected from the figure of 0.4% q/q. However, if the Eurozone did see a surprise uplift this could cause the Euro to surge as it would further support the ECB’s plan

GBP

UK cabinet split on show again
The future of Secretary of State for Exiting the European Union David Davis appears in doubt, as he and Prime Minister Theresa May meet today to discuss a crucial element of the UK’s Brexit plans.

It was widely reported yesterday the UK Government would be announcing a ‘backstop’ plan for the UK in relation to the customs union today. This would mean that the UK would stay part of the union after the Brexit transition period comes to a stop at the end of 2020, unless an agreement has been made in relation to the Irish border and what controls will take place there. In a speech given on Wednesday, Mr Davis suggested that no such plans could be presented until they have been agreed at the cabinet meeting taking place today. Mr Davis has objected to the fact that the plan appears open ended, with no clear date as to when the UK would definitively exit the customs union.

If Mrs May decides to push the plans through without the explicit approval of all the cabinet, it has been widely reported that Mr Davis may resign. The backstop plan would signal a ‘softer’ Brexit, where the UK stays closely aligned with EU rules on trade. In the past, when we have had indications that the UK could still have access to the customs union, or single market, the British Pound has received a boost. However, the potential resignation of a senior cabinet minister, particularly such a prominent pro-Brexit one, could weaken the Prime Minister’s position, and will add extra pressure before the key legislation vote on the 12th.

GBP/USD sits in the middle of the $1.34 handle this morning, and a Reuters poll released this morning suggests that there is a degree of confidence returning to the pound. The poll’s median estimates suggest that in a month’s time, Sterling should be at $1.33, in six months at $1.35, and in a year it will have jumped to $1.41. The $1.40 level would be dependent on a Brexit deal being agreed though; if a ‘no deal’ scenario becomes likely these forecasts will change sharply (source: Reuters).

USD

Joyless June for USD?
The oppressed US Dollar continues to suffer selling pressure this month, putting the brakes on its majestic month of May.

The US Dollar Index, which tracks the strength of the dollar against a basket of currencies, staged one of its biggest monthly rises in May since the end of 2016. It was helped partly by the rise in US Treasury yields, namely the 10-year, which breached the key 3% mark and sparked a wave of dollar demand last month. It looks like June won’t be so jubilant though as the dollar index, having hit a ceiling around a 6-month high of 95 in May, has reversed towards 93, a 3-week low. The retreating 10-year Treasury yield may be partly to blame, but the rising political tensions on tariffs and trade wars will likely be hampering dollar demand.

According to Reuters analysis, the performance of the dollar in June is historically weaker. The analysis revealed that since the year 2000, the dollar index has fallen in the month of June in 12 out of the past 18 years. May was such a storming month, it is possible we are witnessing a bout of profit-taking, meaning we could indeed see a repeat of the pattern this month and EUR/USD could build on its recent gains and allow GBP/USD to continue scrambling away from its 6-month trough.

Once again it is a relatively quiet day for economic data other than US jobless claims due at 1:30pm this afternoon. This week’s initial jobless claims is forecast at 225k, up from last week’s 221k, and may dampen the optimism on the US labour market in contrast to last Friday’s upbeat non-farm payroll figure. 




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