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Strong German trade data provides no respite for Euro

Today’s macro highlights:

  • USD - Producer Price Index (April)
  • USD - Wholesale Inventories (March)

Strong German trade data provides no respite for Euro

There was limited economic data published yesterday but one trend remained firmly in play and that was continued weakness in EUR/USD. The market shrugged off some better than expected German trade figures and instead focused on the prospect of fresh Italian election in the summer as a reason to talk the common currency dwn further still, testing fresh lows for the year to date. That bigger than expected increase in the number of US job opening also served to lift the greenback as it has the prospect to fuel inflationary pressures, leaving the pair very much on a downward trajectory.

Fundamentals for the day ahead are thin on the ground once again, but with inflationary pressures very much setting the tempo for rate hikes as far as the Federal Reserve is concerned, the US Producer Price Index data due at 1.30pm BST will attract some attention. This will be especially significant on the basis that it includes labour costs so given yesterday’s JOLTS job opening reading - there’s now a job available for every unemployed American - anything that comes in above expectations will cement expectations of a US rate hike in June, with more to follow soon after.

Again, from the US we have Wholesale Inventories for March at 3pm BST. Analysts are forecasting a very modest uptick here, which given the current enthusiasm we’re seeing for the dollar is likely to be overlooked. That said, anything rising too quickly - say a build of inventories towards 1% - could be sufficient to weigh down the dollar’s current advances, if this is interpreted as consumer demand starting to wane. Despite a cheery economic outlook, the prospect of steadily rising borrowing costs could impact sentiment. 

Looking a little further ahead, we have the Bank of England’s Monetary Policy Committee making their next call on interest rates tomorrow, along with the release of the quarterly inflation report. The Bank has tended to coordinate changes in policy with the release of this key document and just a couple of weeks back, the expectation had been that a quarter point hike was as good as guaranteed. Dovish comments from Mark Carney and weak economic data means few now expect to see a change tomorrow, but any clues in the inflation report as to what might happen in August could lead to further volatility for the Pound.

The complex UK political situation is also worthy of note. This is very much an ongoing challenge but the Brexit negotiations, the pivotal role of the DUP in propping up the Conservative government and in-fighting within the cabinet is making for something of a perfect storm. There can be little doubt that this clumsy combination is weighing on the Pound, but unless one faction makes some notable concessions, then downside pressures will prevail.

Cable is continuing to hold steady around the lows for the year. The absence of any economic data from the UK again could prove supportive for the Pound in the short term, but political risks continue to build as fractures within the Conservative party are highlighted. Any suggestion that the current government cannot hold onto power would obviously leave Sterling badly exposed.

Similarly, the Euro is being subjected to political risks of its own, with the prospect of fresh Italian elections in the summer providing downside pressure against the US dollar. It’s worth bearing in mind we’ve seen this before with both the French and German elections - the market took a far darker view of the prospective outcome than proved to be the case. That said, with selling being sustained, a move towards 1.17 and a test of the December 2017 lows could follow.

The pair has seen two solid days of gains, although perceived Euro weakness as opposed to Sterling strength is the driver here. If this can be sustained then a break above 1.15 and a move towards fresh highs for the year to date could follow. UK political uncertainty is probably the biggest single unknown factor.