Sterling got off to a mixed start to the week despite slight optimism from the industrial sector which was reflected in Monday’s early release, the pound failed to make any further inroads against its major currency counterparts.
The CBI industrial trends survey surprised the markets with a slight pick up which added to the interesting gains by the UK FTSE 100 index (+3.1%) throughout last week. Businesses might be showing signs of confidence now that the government are closer to announcing a reduction of social distancing (Financial times) and indeed the Bank of England confirming last week they now expect a far less severe contraction in Q2 than initially thought. Furthermore, it is worth remembering from the most recent reports, retail sales also jumped by over 11% last month highlighting a gradual rekindling of consumer spending too. The hope was that sterling might enjoy a boost too as a result of the increased optimism.
Evidently, this month’s facts continue to weigh heavily in the eyes of the markets however. Headlines of debt exceeding the total of UK GDP and new job opportunities falling by over 40% make for particularly bleak reading and the pound has suffered as a result.
It will be interesting to see if yesterday’s industrial survey filters through to this morning’s survey from the manufacturing sector, in which case we might see a slight boost for sterling and could well prove to be a trend setter for the pound as we move closer to the second half of the week. Other factors worth watching out for are the UK government’s plans to safeguard private ownership of organisations that are key to supporting public health from the growing threat of foreign investors. It will be interesting to see how this might disrupt appetite for the pound.
The single currency has managed to maintain it’s grip over the pound, holding GBPEUR rates below the 1.11 mark so far this week, reflecting the continued support behind the euro at present. This morning’s business confidence surveys for the manufacturing and services sectors for France and Germany were meant to be the main challenges that could have threatened the euros resilience, particularly as yet another competition probe was opened by the EU as they look into the potential merger between Fiat and PSA. However, levels of optimism between Europe’s heavy weights have climbed once again and may well help the single currency push sterling back even more.
It will be interesting to see if these releases help weather the storm from a geopolitical standpoint. In particular, the US’ withdrawal from taxation talks over large tech firms with renewed trade tariff threats once again finding themselves on the table. We saw throughout 2019 how difficult the euro found it to establish itself on the international stage as the bloc found itself in the middle of the US and China’s trade war. A similar story here, particularly given current circumstances could spark a new trend for the euro as time goes on.
The dollar was forced to loosen it’s grip over sterling as we started the week with weakening housing data and a perceived cautious stance from the Federal Reserve limiting investor appetite. Indeed, existing home sales dropped by 9.7% in the month of May, reflecting an understandable fall in consumer confidence. It will be interesting to see if further losses in the sector are picked up in the US Census Bureau release today in which case further dollar weakness could follow.
This afternoon’s business confidence releases from the manufacturing and services sectors could prove to be the main market drivers however. If last month’s retail sales readings are anything to go by, which remain over 6% below levels seen last year, we could be in for a volatile first half of the week for the dollar.
Looking at the broader picture, one thing supporting the greenback for now is the continued stalling within global markets. With investors still fearful, many have decided to pull their commitments towards safer options until the outlook becomes clearer. This has helped prop up demand for the dollar, with US companies having repatriated nearly $125bn in overseas profits as reported by the Wall street Journal. It will be interesting to see if this proves to be a counterweight as the pound strives to sustainably break through the 1.25 mark.
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