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EU migration deal sends common currency soaring

Today’s macro highlights:

  • EUR - German Unemployment (June)
  • GBP - Q1 revised GDP
  • USD - PCE Deflator (May)

EU migration deal sends common currency soaring

After an uneventful session on Thursday, the Euro found some meaningful support overnight after EU leaders agreed on a plan to better manage migration. Failure to find a solution here could have resulted in Angela Merkel’s coalition government falling and some had suggested this could be the beginning of the end of the European Union. EUR/USD added three quarters of a cent off the back of the news, whilst read across for GBP/USD has seen the pair add around half a cent in recent hours.

Of the data we did see released yesterday, there was little to inspire. The third revision to US Q1 GDP missed expectations, being marked down to 2%. German inflation also came in at 2.1% for the year, 0.1% below forecasts. Markets are increasingly anxious that the unfolding trade war is going to stub out economic growth globally, leaving numbers like these to take on added significance.

In light of yesterday’s underwhelming numbers, expect the German unemployment reading at 8.55am BST to be under scrutiny. Although the Euro may have been buoyed in overnight trade off the back of that migration deal, at the same time this means there could be a willingness to take profits if the data starts to look somewhat less encouraging. Equally, Eurozone inflation for June is due at 10am BST and again if we see these readings falling off in line with yesterday’s German print, this could result in more Euro selling. The ECB is still open to the idea of extending its bond buying if further economic stimulus is deemed necessary.

The third revision to the UK Q1 GDP figure is due at 9.30am BST. This number was seen as being constrained by the unseasonably bad weather we saw at the start of the year so by many accounts it’s the hope that we see a rebound in the Q2 figures that really counts, but a dip into negative territory for the quarter’s figure would be troubling for those long of Sterling.

The PCE deflator is seen as the Federal Reserve’s preferred measure of inflation and will be released at 1.30pm BST. Again, with that hawkish outlook prevailing amongst US monetary policy setters, a meaningful dip here could start to cause a rethink on the idea of us seeing two more interest rate hikes from across the Atlantic this year. However if the picture is darkening elsewhere too, then the safe haven lure of the dollar may win out. 

Marked gains off the back of that EU migration deal have provided some support for the pair, but is this overdone? Any hope in consolidating these gains will be very much reliant on no disappointment in the GDP reading.  

The migration deal also provided short term support for the Euro but indications that the plan to wind in QE will have to be extended could well lead to further weakness here. Any shortfall in Eurozone inflation could see a quick reversion of these gains. 

The migration deal was better received by the Euro than the Pound, although the pair has now bounced off overnight lows. The ongoing battle over dealing with Brexit continues to weigh here, both in terms of the economy and the stability of the British government, driving the pair to almost eight month lows.