G7 Becomes G6+1

Trade war fears hit dollar

The focus of the FX market has switched to concerns over an intensification of “tit-for tat” trade restrictions as the G7 Heads of Government get set to meet in Canada.

President Trump’s decision to implement tariffs on U.S. imports of steel and aluminium from Canada, Mexico and the EU, together with several Chinese imports has created an atmosphere where Trump will be isolated and told that his actions range from “unfair” all the way up.to “disastrous”.

The dollar is suffering from the threat of an all-out trade war as any retaliation on the tariffs will hit the economy and lower expectations for tighter monetary policy although a rate hike at next week’s FOMC meeting is now considered a certainty. Following the March hike, the question now facing the market is will there be one or two further hike this year.

With the U.S. being the only G7 country actively tightening monetary policy, the differential could be a source of dollar support for some time to come.

The dollar index reached a low of 93.66 yesterday before recovering to close just above 94.

Last Friday’s employment report seems likely to have made up trader’s minds that the FOMC will hike although the inflation report could scupper those ideas if the YoY data doesn’t continue to move closer to 2%.

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Italian Finance and Economy Minister calms market fears

The single currency staged something of a rally yesterday as the new Italian Minister of Finance and Economy, Giovanni Tria, said neither he nor either of the coalition partners in Italy’s new Government wish to leave either the EU or Eurozone. This calmed market nerves over the policies of the new Government which had threatened to bring further doubts over the longevity of the whole “EU experiment”.

The Euro reached 1.1745 versus the dollar but was unable to sustain its advance and fell back to close at 1.1698.

As the policies of the coalition become clearer there is little doubt that their spending plans will bring concern to Brussels which will be worried about its response fanning any anti-Euro flames amongst the Italian population.

One of the major factors which saw Europe’s first populist Government get elected was the dislike of the overbearing attitude and the bureaucratic nature of the manner in which the region operates.

With monetary policy on hold and any withdrawal of additional accommodation still in the balance, the euro will be subject to political concerns although the imminent danger now seems to have passed.

A further concern is the apparent slowdown in the economy which so far is only affecting the larger nations, if contagion occurs and the smaller economies also feel the effect, an increase in accommodation cannot be ruled out together with a negative reaction by the currency.

Sterling facing Brexit showdown

Although there is no “official” date yet for the release of the UK’s Brexit proposals, a leak from Brussels suggests that whenever they are published the solution for the Irish Border issue will be unacceptable to the EU negotiators.

There are two dates for the calendar that will see greater volatility for the pound this month. The first is next week’s debates in Parliament where the Brexit bill will again be considered after the Government was defeated fifteen times in the Upper House over various clauses in the bill.

Next week’s Parliamentary votes are sure to be close although the creation of a political element means that MP’s will be voting along party lines and not in accordance, in several cases, with the will of their constituents.

The second date is the EU Summit that will take place in Brussels on 28/29 June. In a similar manner to the Summit late last year, at which the EU agreed the transit from stage one to stage two, it was expected that the proposals for the future relationship would be ratified, but with the two sides still far apart that decision may have to be delayed.

The pound fell by 3.43% in May its largest monthly fall since the Brexit referendum as several headwinds conspired against the currency. Those factors have not gone away and the pressure on the pound is more likely to intensify than fade. It reached a low of 1.3294 yesterday before closing at 1.3313. Overnight it has appeared weak but traded in a very narrow range.