International and country politics dominated the headlines last week and arguably had a strong bearing on major currencies.
Europe was at the centre, with Italian President Mattarella finally confirming a populist coalition government led by Giuseppe Conte after weeks of uncertainty. In Spain Prime Minister Rajoy was ousted in an unprecedented parliamentary no-confidence vote and replaced by the leader of the opposition Socialist Party, Pedro Sanchez. European markets, including the Euro, equities and Italian/Spanish bond prices, rebounded after a sharp sell-off earlier in the week.
US President Trump also remained in the spotlight, announcing on Friday that the US would introduce tariffs on steel and aluminium imports from the European Union, Canada and Mexico. This has sparked fears of an all-out trade war, with Mexico having already announced retaliatory measures. At the same time trade relations between the US and China remain tense ahead of the 12th June meeting between President Trump and North Korean leader Kim Jong un. The Dollar’s reaction has so far been pretty muted.
With little UK-centric news for markets to digest Sterling continued to tread water. The Australian Dollar reacted little last week to decent Australian corporate profits, retail sales and labour market data but the Aussie Dollar Trade-Weighted-Index (TWI) has today appreciated to its highest level since mid-March. The Kiwi Dollar’s steady gains last week have extended today and the TWI is now up about 2% since 15th May.
US Dollar
The Dollar TWI made small gains last week thanks partly to robust US labour market data and manufacturing sector data which have seemingly cemented market expectations of a 25bp Federal Reserve rate hike on 13th June. The US economy is ticking along nicely but there are still few signs that this is translating to faster real wage growth and the consensus forecast is still very much that the Federal Reserve will only have to hike rates twice more between now and end-year. This is seemingly weighing on the pace of Dollar appreciation which continues to slow.
Sterling
The TWI remained in the middle of a 1%-wide, five-week old range with markets seemingly waiting for clearer signs as to whether the Bank of England may hike rates at its August policy meeting and whether the government will agree to a new customs union with the EU.
Euro
The Euro TWI has recovered 1.1% since Tuesday and EUR/USD is back above 1.17 with markets seemingly confident that the new Italian government will not try to take Italy out of the Eurozone and that US import tariffs will not significantly hurt already slowing Eurozone economic growth. The Euro’s resilience to endogenous and exogenous shocks is impressive, suggesting that there is still appetite to buy the Euro on dips. Nevertheless the Euro and European asset prices may still remain volatile near-term given the uncertain political, economic and geopolitical backdrop.
