Financial markets were pretty quiet last week despite all the noise generated by US President Trump during his 3-day visit to the UK and ahead of his visit with Russian President Putin in Helsinki today. The Dollar was marginally stronger while the Euro TWI remained near its multi-month high. Sterling was again directionless following the British government’s publication of its much-awaited Brexit White Paper.
Dollar
The Dollar TWI appreciated about 0.5% last week. US macro data remain solid but President Trump’s increasingly tough line on trade is clouding the outlook for both US and global trade and growth. It remains unclear whether the Federal Reserve will hike twice more this year given this backdrop.
Sterling
Sterling continues to tread water, with markets unwilling to push the currency in either direction and GBP/USD and GBP/EUR still stuck around 1.325 and 1.13, respectively. UK GDP growth picked up in April and May according to monthly ONS data and the MPC seems to be inching towards a rate hike at its 2nd August policy meeting although clearly not all MPC members are yet on board. Market is currently pricing in 19bp of hikes at the meeting and today’s strong VISA spending data, showing a second successive rise in retail sales in June, are likely to reinforce the view that the Bank of England will want to hike rates before Brexit negotiations likely step up another gear in coming months. Prime Minister Theresa May’s government published its comprehensive blueprint for life after Brexit on 12 July but doubts remain as to whether it will be acceptable to the EU and to the British Parliament. The next few months will be critical, with growing talk of a second referendum in which the British electorate would have three choices: a no-deal (“Hard Brexit”), the deal on the table at the time of voting (“Soft” Brexit) and remaining in the EU.
Euro
The Euro remained strong last week, weakening slightly versus the Dollar (EUR/USD sub 1.17) but appreciating versus Sterling and most of the currencies of the Eurozone’s main trading partners. Political risks have dissipated, at least for now, and markets seem confident that the ECB will start tapering its QE program as of October. An escalation of US-centric protectionist measures against the Eurozone and in particular the important auto sector are arguably tail risks to both the Eurozone economy and currency.
