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Trade, Central Bankers and Brexit to Direct the USD, EUR and GBP

By:
Bob Mason
Published: Jul 9, 2018, 06:48 UTC

It's been risk on through the early part of the day, with only the U.S Dollar suffering as the markets look beyond the trade tariffs to positive economic data out of the U.S and Germany, though sentiment could turn should Trump make any more moves on trade tariffs.

GBP/USD daily chart, July 06, 2018

Earlier in the Day:

Economic data released through the Asian session this morning was limited to May current account figures out of Japan, which had little impact on the Japanese Yen.

Japan’s current account surplus widened from ¥1.845tn to ¥1.938tn in May, falling short of a forecasted widening to ¥1.240tn, on an unadjusted basis, while narrowing from ¥1.89tn to ¥1.85tn on a seasonally adjusted basis.

The Japanese Yen moved from ¥110.419 to ¥110.423 against the U.S Dollar upon release of the figures, before easing to ¥110.43 at the time of writing, a gain of just 0.02%, with risk appetite returning through the session to ease demand for the Yen at the start of the week.

Elsewhere, the Aussie Dollar and Kiwi Dollar were up 0.52% and 0.29% respectively, with a weaker U.S Dollar stemming from concerns over the negative effects of a U.S – China trade war on the U.S economy supporting the pair, the general view being that both the Australian and New Zealand economies having potential upside in the near-term from increased demand for raw materials from China.

In the equity markets, it was “risk-on” through the session, with the CSI300 and Hang Seng rallying 1.77% and 1.47% at the time of writing, while the Nikkei and ASX200 ended the day with gains of 1.21% and 0.22% respectively.

Friday’s positive labour market stats out of the U.S and Friday’s gains in the three U.S majors provided support at the start of the week, with the U.S futures pointing to more upside later in the day, the markets brushing aside trade war jitters, as earnings season kicks off this week.

The Day Ahead:

For the EUR, key stats through the day 23re limited to Germany’s trade figures for May, which had been forecasted to be EUR positive. Following strong factory order and industrial production figures released last week.

Germany’s trade surplus widened from a downwardly revised €19bn to 20.3bn, which was in line with forecasts.

  • Exports rose by 1.8%, month-on-month in May, which was better than a forecasted 0.8% rise, following April’s 0.3% decline.
  • Imports rose by 0.7%, which was better than a forecasted 0.3% decline, following April’s 2.6% rise.
  • Year-on-year, the trade surplus narrowed from €21.8bn to €19.7bn, with German exports falling by 1.3%, while imports increased by 0.8%, year-on-year in May.
  • Exports to EU member states increased by 2.4%, while imports rose by 2.9% year-on-year, while exports to the Euro area increased by 0.1%, with imports rising by 0.6%.
  • Exports to EU countries that were not in the Eurozone increased by 6.5%, while imports from the same member states increased by 7%.
  • Exports to non-EU countries fell by 6.4%, while imports from non-EU countries fell by 1.9%

The EUR moved from $1.17696 to $1.17773 upon release of the figures.

Outside of the data, ECB President Draghi is scheduled to speak, which will likely influence further direction for  the EUR, recent stats out of Germany and the Eurozone suggesting that economic conditions improved in the 2nd quarter, though the threat of an all-out trade war should temper any hawkish chatter.

At the time of writing, the EUR was up 0.23% to $1.1773, with Draghi and noise from the Oval Office the key drivers through the day.

For the Pound, there are no material stats scheduled for release, which will leave direction through the day hinged on Brexit chatter and market sentiment towards BoE monetary policy.

While recent economic data and central banker chatter has been a positive for the Pound, Brexit continues to deliver uncertainty, with focus through the day being on whether Theresa May can garner the necessary support in the House of Commons for the soft Brexit plan that was agreed by the Cabinet at Chequers.

Talks of a backlash hit the news wires over the weekend, with Theresa May facing a possibly hostile House of Commons later today that could dent the Pound’s rally or drive it, depending on how successful May’s close allies have been in behind the scenes meetings to turn sceptics around. News of chief Brexit negotiate David Davis resigning on Sunday will be another concern going into the European session.

At the time of writing, the Pound was up 0.27% to $1.3319, Brexit chatter and noise from the Oval Office the key drivers through the day.

Across the Pond, there are no material stats scheduled for release, which leaves the Dollar in the hands of trade war chatter, U.S President Trump likely to ramp up the rhetoric at the start of the week in response to Beijing’s retaliatory tariffs.

With neither side showing any signs of backing down, appetite for U.S Treasuries could surge in the early part of the week to pressure the Dollar further, the Dollar Spot Index back down at 93 levels for the first time since mid-June.

On the policy front, FOMC member Kashkari is scheduled to speak in the early afternoon, though we would expect the Dollar to show little response barring hawkish commentary that is unlikely, when considering the possible negative effects of the ongoing trade war on the U.S and global economies and Kashkari’s traditionally dovish stance on policy.

At the time of writing, the Dollar Spot Index was down 0.16% to $93.808, with the Oval Office in focus, Kashkari’s likely dovish comments unlikely to have too much of an impact later in the day.

Across the border, with no material stats scheduled for release through the day, the markets will be looking ahead to the Bank of Canada’s interest rate decision on Wednesday, the markets now having priced in a rate hike, though it remains to be seen whether members will be willing to go for a hike, with the trade tariffs being thrown around like candy.

The market view is that the BoC will go ahead, which does leave the Loonie at risk of a tumble should the Bank stand pat.

At the time of writing, the Loonie was up 0.08% to C$1.3074, with trade war chatter the key driver through the day.

About the Author

Bob Masonauthor

With over 20 years of experience in the finance industry, Bob has been managing regional teams across Europe and Asia and focusing on analytics across both corporate and financial institutions. Currently he is covering developments relating to the financial markets, including currencies, commodities, alternative asset classes, and global equities.

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