Today’s macro highlights:
Cable eyes 4th consecutive day of gains
There was no shortage of political turmoil last week, with Donald Trump turning the screw on a global trade war, Italy’s new populist coalition government being waved through and Spain’s Prime Minister being replaced following a vote of no confidence. The unsuspecting winner amongst all this appears to have been the Pound, with cable in particular having been on the bounce since last Tuesday. The pair was arguably oversold, but with political uncertainty in continental Europe now moving out of the picture - and that better than expected manufacturing PMI reading from the UK on Friday - the Pound is at last finding some favour.
UK Construction PMI data for May is scheduled for release at 9.30am BST and opinions are divided as to just how healthy this reading will be. We saw a sharp improvement between the March and April figures owing to the bad weather earlier in the year, but unless we see something comfortably above the break-even 50 mark then cable could find it difficult to maintain this corrective run higher. The Bank of England still has the potential to increase interest rates in August as it looks to reign in inflationary pressures. Any suggestion however that construction is slowing down will provide little incentive to increase borrowing costs.
Across the Atlantic, we have the April US Factory Order data set for release at 3pm BST. Expectations are that we’ll see some contraction in this figure, but the rampant jobs growth posted on Friday should ensure there’s no real downside for the dollar off this reading, so long as any reduction is measured. Yes there’s a risk that US trade policies will impact the export market, but given the potential lag in other nations imposing import tariffs and the latent domestic demand, the outlook in the medium term here should remain positive.
The weekend’s G7 meeting of finance ministers focused very much on trade, with heated objections being raised to the US tariff proposals from all sides. A key implication to watch here will be the Eurozone’s response, with opinions already proving divided. France wants to take an aggressive line against what it sees as US bullying, whereas Germany - a major exporter to the US - is seeking a more conciliatory tone. The next round here will likely be Friday’s summit of the G7 leaders, although many will be resigned to the fact this meeting is set to revolve around rhetoric rather than meaningful action.
Cable has moved back above the lows from December 2017 and so long as today’s construction PMI reading doesn’t disappoint then the trend higher could well be sustained. A break towards the early May levels around 1.35 could follow, although domestic political uncertainty has the potential to keep gains in check.
The pair is struggling to break above 1.1700, with EUR/USD being held back by perceived political risk in Italy. This could however be discounted if confidence can start to grow that the coalition government will show a degree of prudence when it comes to public spending, in turn acting as a catalyst to propel the pair back towards the 1.2000 mark.
On Friday, Sterling posted its best day of gains over the common currency since early April. This rally has now stalled, but it does put the up-trend for GBP/EUR back on track. Brexit uncertainty has the potential to hold back the outlook for the Pound, but any fears of a showdown between Brussels and Rome over Italian spending plans - plus the thought of a BoE rate hike in August - could lift the pair back to recent highs around 1.16.