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Italian chaos pushes GBP/EUR to one-month highs, EUR/USD to ten-month lows

Today’s macro highlights:

  • EUR - German Unemployment (May)
  • USD - ADP Payroll Survey (May)
  • USD - US Q1 GDP revision

Italian chaos pushes GBP/EUR to one-month highs, EUR/USD to ten-month lows

The common currency took something of a nosedive during yesterday’s session, with markets gripped by fear over the unfolding political situation. Impeachment of the President seems unlikely, but with the electorate’s resolve still firm, a re-run of voting later in the summer has the real prospect of returning an even more focused outcome. It means more uncertainty in the months ahead and given the market’s inherent dislike for this, we should expect even more volatility in the near term. It’s worth adding that with markets pricing in increased risk not just for Italy but also other ‘club-Med’ Eurozone member states like Portugal and Greece, this has real potential to push back ECB attempts to taper its bond buying program, too - again something that will prove negative for the Euro.

Further developments out of Italy will be closely watched today, but away from the political agenda we also have some key economic releases. German unemployment data for May is to be published at 8.55am BST and expectations are that we’ll see nothing untoward here. The Eurozone’s economic powerhouse had stumbled earlier in the year, but that appears to have been a short lived blip, rather than any longer term change in direction. Certainly further weakness for the common currency will continue to buoy demand for exports, even in the face of those possible punitive trade tariffs from the USA. German inflation data is also set to follow at 1pm BST, with a nudge higher here having the potential to be positive for the Euro in the short term.

Across the Atlantic and sticking with the employment theme, we have the ADP payroll survey slated for 1.15pm BST. This is generally seen as a curtain-raiser ahead of Friday’s non-farm payrolls and the market is bracing itself for a notable month-on-month contraction. Again with the dollar having had such a good run - the DXY dollar index is up 5% over the last five weeks and now trades at 10 month highs - despite the currency’s safe haven allure, there may be a temptation to book profits if there are signs that employment growth is slowing as this could well precipitate a more dovish tone at the Federal Reserve.

We also have the first revision to the Q1 GDP numbers out of the US at 1.30pm BST. There are no expectations of any real deviation here from the first print a month ago, but any surprises could again help shape opinions at the Fed. The door is still open as to the pace of policy tightening we’ll see through the remainder of the year, but the tone is more likely to soften - risk to the dollar seems weighted on the downside.

Cable has been caught up in the backwash of the emerging Eurozone crisis, pushing the pair to fresh lows for the year as a result. Historically we have seen arguments to say this is overdone on the basis that Sterling offers some exposure to Europe without being part of the Eurozone, but ongoing confusion over how Brexit will play out is weighing, too. Last November’s lows just above 1.30 are now in focus.

Another down day saw the pair hit those November lows of 1.1550 and although we may have a degree of consolidation in play right now, with so much uncertainty hanging over the Eurozone once again, another leg lower is entirely feasible.

Yesterday was the sixth consecutive day of gains for the Pound over the Euro, although the rally stalled at 1.1500. So long as we see no surprises out of the UK, we can start thinking about a return to the recent highs in the 1.16 region as having potential.

Did you know….
Bond yields move inversely to the price of the underlying instrument. A £100 bond paying a £3 coupon each year would have a yield of 3%. If demand for the bond increases and the price jumps to £110, the interest - or coupon - payment is still £3, but that’s now a yield of just 2.73%. Similarly, if the bond falls from favour - say investors are worried that the issuer will default - and the price drops to just £90, the yield has now risen to 3.33%.