Turkish crisis contagion spreads; Pound still under pressure

Friday saw a wave of risk aversion consume global markets, particularly given concerns about the risk of contagion emanating from the Turkish crisis for Europe’s biggest banks. This saw perceived safe havens such as the dollar rally strongly, while the Euro weakened markedly. Meanwhile, in the UK, the Pound was pummelled given a rise in the probability of a “no deal” Brexit. Some positive economic data releases (Q2 GDP, which met market expectations, June’s manufacturing output, which beat consensus forecasts, and a larger-than-expected narrowing of the trade deficit), were not enough to offset the negative effect of Turkey-related market fears, which weighed further on the currency.

The day ahead is quiet, with no major economic releases scheduled for the main markets. Looking toward the rest of the week, there’s a raft of data out of Europe on Tuesday, with Eurozone and German GDP, and Eurozone and German ZEW surveys scheduled for release in the morning.

In the UK, we can look forward to some labour market releases including wages and employment, with inflation scheduled for later in the week. The labour market is expected to remain strong while it’s widely anticipated that inflation will nudge higher, which should provide much-needed support for the Pound.

In the US, retail sales (scheduled for 13.30 BST on Wednesday) is the main economic release of the week. There are also some housing market-related data due to be reported on Thursday. Ongoing signs of strength in the economy will likely further propel the dollar along its upward path.

GBP/USD

Cable continued its fall, slumping to its lowest level since mid-2017. The risk of a “hard” Brexit, concerns about Turkish crisis contagion and a stronger dollar meant the odds were stacked against the pair. This week’s economic releases could provide some temporary respite for the beleaguered Pound although ongoing haven demand and signs of economic strength in the US may well keep the dollar on the up-and-up for now.

EUR/USD

The pair fell to its lowest level in more than a year on the back of fears about the risk posed by the deterioration in Turkey; specifically, the exposure of major European banks to the troubled country. Given a relatively quiet calendar of economic releases, further developments on the Turkish front are likely to underpin the pair’s movements in the next few days.

GBP/EUR

The Pound has held up better against the Euro than against the dollar but continues to move on Brexit-related news rather than economic fundamentals. To this end, this week’s EU/UK negotiations will be important for the pair’s direction of travel.