Merkel stokes euro

Politics again

It was a difficult start to the week for sterling but the pound did not suffer alone. The US dollar and South African rand fared just as badly. The rand did nothing wrong: it simply gave back some of Friday's gains. For sterling and the Greenback the problem was politics.

Donald Trump's tour of the Middle East and Europe has not staunched the flow of controversy in Washington. There were two notable issues on Monday to deter investors from the dollar . On the security front Michael Flynn, the short-lived National Security Advisor, refused to hand over documents to a senate committee and the Washington Post reported presidential efforts to stop an FBI investigation. On the economic front the White House previewed a wish-list budget that would shift vast amounts of money from social security to the Pentagon.

Sterling's issue was the prime minister's re-stating of their plans for Social Care which featured in last week's manifesto. Investors see damage being done to the Conservatives' electoral advantage, it being eroded both by the measure's inclusion in the manifesto and by the prime minister's reaction to criticism of it. 

Merkel intervention

The German chancellor told an audience that her country was more successful at selling abroad because the single currency was too weak. Whether Angela Merkel would actually like to see it strengthen is open to doubt but her comment sent it higher on Tuesday morning.

At a panel discussion in Berlin she responded to a question about trade with the observation that "the euro is too weak - that's because of ECB policy - and so German products are cheap in relative terms. So they're sold more." Investors seized upon the comment, sending the euro about half a cent higher against the pound and the US dollar. Ms Merkel's criticism was not the first of its kind from German leaders, who have made no secret of their opposition to the European Central Bank's quantitative easing spree. 

There was little else to enthuse investors yesterday. Economic data were limited to Greece's current account deficit and the Chicago Fed's national activity index. 

Borrowing and sales

Among the slew of provisional purchasing managers' index readings the only two ecostats relating directly to sterling are public sector borrowing and the CBI's distributive trades survey, which measures retail sales in May.

The relatively punchy 38% reading delivered by April's distributive trades survey is unlikely to be matched today: analysts are going for 10%. Data released earlier this morning indicated a softening of the Japanese manufacturing sector and a narrowing of Switzerland's trade surplus. The first revision to German gross domestic product left first quarter growth unchanged at 0.6%.

The provisional PMI readings from Europe are expected to be, on the whole, a touch higher on the month. Those already released point in that direction and the euro has responded positively. This afternoon brings US new home sales, which probably slowed in April.