Dollar strength wins out as ECB strikes a cautious note, Euro panics over Turkey

Today’s macro highlights:

  • GBP - GDP (June)
  • GBP - Trade balance (June)
  • USD - Consumer Price Inflation (July)

Dollar strength wins out as ECB strikes a cautious note, Euro panics over Turkey

By all accounts it was the ECB’s economic bulletin which set the tone in currency markets during Thursday’s session. Despite the report caveating the risk of escalating trade tariffs as having global implications, the admission that Eurozone economic growth was lagging what was seen in 2017 - and that there was no suggestion the situation would improve quickly - left the common currency very much on the back foot. The market was quick to look beyond the series of shortfalls in US PPI readings, even to the extent that the beaten down Pound managed to recover a little ground, at least over the common currency.

The Euro is also being pummelled again in early trade today as markets react to news that the ECB is concerned over the exposure some European banks have to Turkey. With relations between Washington and Ankara souring and the Turkish Lira plummeting as a result, the risk of contagion for some of Europe’s biggest banks is back on the table.

After what has been a relatively quiet week for the fundamentals, the tempo is set to pick up somewhat in the day ahead. Hopes are running high that UK GDP figures at 9.30am BST might provide a little respite for Sterling, although the risk remains that against the political uncertainty posed by Brexit, any upside will need a solid outperformance ad even then could prove rather short lived. The ONS recently changed the way it calculates GDP, producing monthly figures in addition to the quarterly statement. This will be the second such monthly print to be published, ensuring there’s at least a comparative figure to be working from.

UK trade balance data will also be under scrutiny, again set for 9.30am. The plummeting value of the Pound should be discouraging imports and making exports that bit more attractive, so failure for this to be reflected in the data will again send another sell signal for Sterling.

1.30pm BST sees the release of US inflation data and given the runaway performance of the greenback right now, expectations will again be upbeat. Analyst estimates expect no change - the core CPI print is tipped to hold steady at 2.3% - but a shortfall here could call into question the Federal Reserve’s hawkish stance over policy tightening. The DXY index has pushed out to fresh highs for the year off the back of yesterday’s Euro weakness, so by all accounts there could be the scope for some downside pressure on the dollar as a result.

Beyond all this however, the risks associated with Brexit cannot be understated and will provide further volatility for the Pound. With Boris Johnson continuing to test both the cabinet and many corners of the Conservative party, a bitter leadership feud remains very much a possibility when politicians return from the summer recess - and should by all accounts be rather more focused on trying to steer the country through Brexit, rather than continuing the in-fighting.

GBP/USD

The pair has fallen for six days straight, but with the risk of a no-deal Brexit having the potential to provide even more weakness for Sterling, bargain hunters may be reluctant to move in. That said, today’s economic releases could lend some temporary support.  

EUR/USD

The Euro stumbled yesterday off the back of the ECB’s economic bulletin but the pair has been pushed to lows not seen since July ’17 off concern over Turkish Lira exposure. Unless the Turkish President can steady sentiment in a scheduled speech today, downside pressures may accelerate here.

GBP/EUR

The Pound has now recovered Wednesday’s losses which were seen of the back of more pessimism from Mark Carney. Sustaining upside could be problematic, but Euro weakness of the back of the emerging Turkish crisis means Sterling has gained a full cent over the Euro since the early hours of Thursday morning If gains continue, the cross could end up higher on the week.