Sterling at two week low on data and Brexit

The release of the April unemployment report yesterday stoked fears that the economy is about to turn despite the Q1 GDP data being stronger than expected. One of the supports for Sterling as the Government continues to grapple with the main opposition party over Brexit is the possibility that the Bank of England may be forced to hike rates later this year to combat rising inflation.

Yesterday’s data showed that wage inflation has possibly peaked at 3.4% in March and yesterday’s 3.2% for April may be the start of a slowdown. This will mean there is less pressure on consumer prices which will remove any pressure on the Central Bank.

Brexit will be a background distraction until there is some concrete evidence of the direction it is going to take. The latest rumour which comes from the Shadow Finance Minister is that no agreement will be possible without some shift in the Governments position over the country’s departure from the single market and customs union.

The fog is beginning to clear a little allowing the public to get an idea of why the talks are not progressing. The fact that the Labour Party is insisting on changes to the Governments attitude to membership of the single market and that any deal is subject to a second referendum means that two major planks of Theresa May’s entire Brexit policy are under attack.

If May remains as Prime Minister throughout this part of the process it appears doomed to failure.

Following the lower than expected wage inflation data and the continuing Brexit talks, the pound fell to its lowest level in two weeks, reaching 1.2903, closing just three pips form the low.

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Eurozone data means the wait continues

It is entirely reasonable for backwards looking data for the Eurozone to remain weak given the factors that are driving the economy. However, if there is to be a recovery starting in Q2 or even Q3, it is time for forward-looking sentiment and activity indexes to start to pick up.

Unfortunately for the single currency that is not happening yet, and yesterday’s release of data confirmed this.

Economic sentiment in Germany turned negative in May falling to -2.1 from +3.1 in April. Eurozone-wide industrial production was lower than expected as was economic sentiment at -0.3% and -1.6 respectively from -0.2% and +4.5 previously.

Q1 GDP data for both Germany and the Eurozone will be released later this morning. In Germany growth is expected to be slightly weaker than in Q4 ‘18 at 0.7% YoY following 0.9% in Q4. The data for the eurozone is expected to be unchanged at 1.2%. The figures are hardly stellar and don’t stand up favourably to the growth rates in either the U.S. or UK but the fact that a recession is now extremely unlikely may provide cold comfort to the single currency.

Weaker than expected GDP data from either Germany or pan-Eurozone may see the single currency test support at 1.1130 and would signal a loss of faith in the ability of the region to turn itself around in the short/medium term. Yesterday, it reached a low of 1.1201.

Dollar awaits some positive direction

As the trade talks with China grind on with no immediate hope of a breakthrough and President Trump claimed a victory over the imposition of fresh tariffs on Chinese imports, the dollar remains in limbo.

With the economy still not convincing analysts of its underlying strength which keeps a lid on the greenback, for now, traders’ minds are starting to turn to the fight for the White House in 2020. The President remains the overwhelming favourite to be the Republican Candidate. That is, of course, provided he can continue in power for his entire four-year term which is not 100% certain.

Retail sales and consumer spending data are the only two pieces of data still due for release this week so the market’s focus will be on the public’s reaction to the ongoing talks with China and the expected fallout for prices.

Next week sees the release of industrial production and durable goods data both of which will influence the markets outlook. While production is reasonably steady at 52.5/53 and well above any concern over a slowdown, the notoriously hard to predict durable goods orders data will give an indication of the ongoing strength of the order books of major manufacturers.

Yesterday, the dollar index rose to a high of 97.56 and closed just about at that level.