Daily Brief

A growing scale of uncertainty

Brexit and trade concerns grow amidst disappointing UK GDP figures

Monday saw an end to the pound’s recent gains against the euro as sterling faced some pressure from the uncertainty surrounding Brexit and trade as well as the nature of the recovery from the pandemic. A speech from Bank of England (BoE) Governor Andrew Bailey contained nothing new from the BoE and did nothing to push the pound either way.

The British pound faced some selling pressure on Monday off the back of a fortnightly gain over the euro. There was no particular news flow to influence it other than bearish traders taking advantage of higher prices to position for potential future Brexit / trade / pandemic related uncertainty. The monthly GDP figures did not offer the pound a lifeline. The economy expanded less-than-expected in May, with the numbers coming in at a gain of 1.8% against a forecast 5%. April had recovered a -20.3% loss. The numbers were expected and didn’t unduly trouble the pound as Chancellor Rishi Sunak commented on the figures, stating that, “today’s GDP figures underline the scale of the challenge we face.”


Waiting for the ECB and the EU Summit

Potential major movers for the euro are happening towards the end of the week – the European Central Bank (ECB) meeting on Thursday, followed by Friday’s EU Summit, but the central currency appeared to be getting a head start with some gains against the US dollar on Monday.

The euro’s gains weren’t just fuelled by optimism and wishful thinking, comments from French Finance Minister Bruno Le Maire suggesting that “consumption activity is just 5% lower than normal” was considered good news in the current environment. In addition, Goldman Sachs raised forecasts regarding the euro, stating that the pandemic and the continent’s response had generated "more confidence in sustained Euro appreciation" due to a range of factors including the European labour market and healthcare infrastructure. These are viewed in a positive light as a means of weathering the current crisis, particularly in relation to the stark differences in the US. Europe may have seen a sharper fall in activity during lockdown, but it is also recording a more significant recovery – a 92% recovery of pre-crisis activity, compared with 67% in the US - and that is good news for the euro. Data from Germany today on investor sentiment could move the euro in either direction, but positive sentiment may help to cement recent gains.


California restrictions highlight US risk

The US dollar is showing signs that it is no longer impervious to its many challenges. Escalating tensions between the US and China have not been positive for the dollar as investors look at the bigger picture. As Washington weighs up further sanctions on Chinese firms; GDP, industrial output and retail sales data from China are all expected to show a V-shaped recovery. California has reintroduced further restrictions as cases of the virus rise across the state. While it is not a full second lockdown, investors can see a pattern emerging and China looks to be on firmer footing.

It is likely that there will be a continued focus on the spread of the pandemic and this may hit the US dollar, which fell against almost every G10 currency last week apart from the Canadian dollar. While the data emerging from the US remains relatively strong, investors feel that the numbers have yet to catch up with the reality and that certain policy approaches make second and perhaps even third lockdowns more likely on a state-by-state basis. In addition, the earnings reports and inflation data due from US banks today may be something that either aids the greenback or piles on further pressure.


Good news, bad news

Positive data from China on imports and exports proved to be good news for the Australian dollar, which made gains against the US dollar. Unfortunately for the New Zealand dollar, it was not pulled upward in its Australian cousin’s wake and remained depressed. The Canadian dollar was also struggling after a 2% drop in WTI prices due to a fall in demand and fears that the demand may not return to previous levels, particularly with an easing of talks regarding the OPEC+ output cuts.

The data showing China’s recovery offers some hope to commodity based currencies, but in the short term, with most of the world further behind China in their recovery from the pandemic, they may remain under pressure. A rise in coronavirus infections in Japan is bad news for the trade-reliant Australia and New Zealand, and will do nothing to boost oil demand and assist the Loonie.

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