Eurozone activity data lower than expected

After the ECB President had raised hopes that this would be the month that sees the green shoots of recovery, activity data and German business confidence indices continue to disappoint. The Munich-based IFO Institute published its review of the German business climate, current conditions and expectations yesterday.

The business climate fell from 99.2 to 97.9 and current assessment from 103.3 to 100.6 although expectations rose from 95.2 to 95.3

Manufacturing PMI was also lower, but the fall from 44.4 to 44.3 was largely discounted. It is clear to the entire market that current conditions remain “challenging” given the ongoing trade dispute between China and the U.S. and the upcoming EU Parliamentary elections, so current conditions were largely expected to be lower. The rise in expectations gave a marginal boost to the single currency.

Activity data for France was better than expected while the composite PMI for the entire region was a little lower.

Given German status as the industrial powerhouse of the Eurozone, it has always been likely that markets would consider its data as a bellwether as there are several anomalies contained in other members figures.

The euro fell to a low of 1.1107 early in the day but recovered strongly to make a high of 1.1189, closing at 1.1182.

This weekend’s elections will be a significant driver for the currency early next week as the results start to be announced. The major concern will be any significant rise in the vote for nationalist/populist candidates who could be given a platform to delay or cancel plans for a more integrated EU.

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May set to bow to pressure

UK Prime Minister Theresa May is set to finally concede defeat in her quest to deliver on the result of the 2016 referendum on EU membership and announce her departure date today or over the weekend.

It is almost certain that Parliament will reject her concessions over a second referendum, a review of any future customs arrangement, and a softening of the prospect of a hard border on the island of Ireland. It is possible, therefore, that a fourth vote will be abandoned and she will depart sooner rather than later.

That will set in motion a scramble to become Leader of the Conservative Party and therefore Prime Minister. There is no doubt that Mrs May will be the scapegoat for the entire Brexit fiasco but there are several other players in the drama who are far from blameless. Chief among these is the Opposition Labour Party who have turned Brexit into a political issue which it was never meant to be.

Yesterday’s voting in the EU elections in the UK will have no significant meaning provided Brexit actually happens. The interpretation of the results will, however, be interesting. A large vote in favour of the Brexit Party, which is being predicted by exit polls, will be considered by Brexiteers as a confirmation of the country’s continuing desire to leave the EU, while remainers will dismiss it as simply a protest vote about the entire process.

The pound continued its fifteen session streak of lower closes versus the dollar yesterday, reaching a low of 1.2605 but closing at 1.2657.

U.S. Threatens currency subsidy tariff

It has long been a major concern, monitored by the U.S. Treasury, that among the issues that put the country at a disadvantage to its trading partners is the artificial weakening of their currencies in order to promote exports to the U.S.

The Treasury announced yesterday that it is considering replacing its twice-yearly “calling out” of so-called currency manipulators with a more meaningful penalty based around increased tariffs.

This is clearly aimed at keeping up the pressure on China which has consistently been top of the currency manipulator league table since it opened up its economy.

The details of the plans are sketchy but should they come to pass it will be interesting how the U.S. provides exemptions to countries like Japan who are considered a close ally but also a currency manipulator. Japan is consistently seen as the world’s largest creditor nation and as such, its currency should be far stronger than it is.

The dollar index appears to be running into some resistance above the 98.00 level and has, so far, been unable to remain consistently above that level. The Treasury’s carefully managed rumour of extra tariffs may have been designed the slow the dollar’s rise as that is more damaging to U.S. exports than any other issue.

Yesterday, the index retraced to a low of 97.80, closing at 97.86. Earlier in the day, it had rallied to 98.38 but ran into significant selling pressure.