Pound struggles to extend BoE inspired gains

Today’s macro highlights

  • EUR - German IFO Surveys (June)
  • USD - US New Home Sales (May)

Pound struggles to extend BoE inspired gains

Last week finished on a rather uneventful note for the major currency pairs, with the overriding observation being the fact Sterling is battling to further the gains posted last Thursday in response to the hawkish tone we saw at the Bank of England. The slew of Eurozone PMI readings were mostly either in line or better than had been forecast, but a shortfall in US Manufacturing PMI - where trade tensions appear to now be acting as a drag - failed to impact the dollar. The prospect of rising US inflation as imports become more expensive off the back of tariffs continues to dominate, despite the fact that we’re seeing a growing stream of indicators that the world’s largest economy may be losing momentum.

We have the forward looking German IFO surveys due for release at 9am BST this morning and again the implications of trade tariffs here will be closely followed. It’s worth bearing in mind that the sampling for these surveys won’t reflect Donald Trump’s latest gambit of a proposed 20% tariff on all European car imports, either. Add to this the fact that expectations are for a modest decline to be seen anyway and it’s difficult to see how this print can end up being positive for the common currency.

Later in the afternoon, we have data due from the US. It’s worth caveating this with the fact that the big challenge being faced across the Atlantic is going to be keeping inflation in check as import tariffs bite. Consumers who are feeling wealthy from the recent economic boom won’t be changing purchasing habits that quickly, so even if the data does start to soften, this alone won’t be sufficient to suggest we’ll see a more conservative outlook over interest rates at the Federal Reserve.

New Home Sales for May are due at 3pm BST and some modest expansion is expected, which would go against other numbers we’ve seen for the sector of late. A positive signal here would certainly help offset fears that the US economy is losing momentum, but to that effect today’s number will perhaps be better considered alongside the Dallas Fed’s Manufacturing Activity print and the Chicago Fed’s National Activity Index - both of which are tipped to fall. In the short term however, those inflationary fears seem as if they may be sufficient to insulate the dollar against any notable downside pressures.

Thursday’s hawkish statement from the Bank of England may have delivered some upside for the pair, but we’ve seen no further advance on this, yet. The UK economic outlook remains clouded, both in terms of raw growth prospects and the implications of Brexit. With a relatively quiet week ahead for UK economic data, it’s difficult to see where further upside may come from.

The Euro was shaken by the prospect of those punitive tariffs on cars exported to the USA, but the downside here proved short lived. That said, with questions still lingering over the timing of ECB monetary policy tightening, so long as a hawkish outlook prevails at the Federal Reserve then the dollar will likely maintain the upper hand.

Thursday’s gains for the Pound off the back of BoE comments have now been completely reversed. The pair has improved from overnight lows, but for the pair to break out of its current range, action - rather than debate - on monetary policy from either central bank is probably going to be the catalyst.