Image © kasto, Adobe Stock
An orderly start for foreign exchange markets to the new week with Sterling enjoying decent gains against the New Zealand and Australian Dollars, and with an empty economic release calendar for the day ahead we expect the UK currency to take cues from external sources.
The US Dollar is an out-performer and the Australian and New Zealand Dollars under-performers thanks to ongoing trade war concerns.
“The US Treasury department reportedly is planning to subject Chinese investments in sensitive US industries to greater scrutiny under a law that would declare these investments to be a threat to economic and national security. The ruling would threaten China’s “Made in China 2025” drive and could therefore lead to an all-out trade war. The news sent AUD lower,” says Marshall Gittler, an analyst with ACLS Global.
“Escalating trade war fears further, Trump is expected to announce new measures during the week, restricting Chinese investments in the US and blocking additional tech exports to China,” says Jussi Hiljanen, Head of European Macro & Fixed Income Research at SEB.
Trump is also threatening new 20% tariffs on European cars in a sign that he could now shift focus away from China to the European Union.
Because Sterling’s economic calendar is empty moves in the Euro and Dollar will probably determine direction in GBP/USD and GBP/EUR.
For Sterling Brexit will be in focus with the EU summit at the end of the week likely to signal just how much progress has been made in negotiations of late, with statements concerning the issue of the Irish border likely to be pivotal.
Euro: German Business Sentiment, Migration
German business confidence data is in focus at 09:00 B.S.T. with markets keen to assess what impact the threat of trade tariffs by Germany has had on the prospects of the Eurozone’s powerhouse.
Analysts are forecasting a reading of 101.9, a miss or beat on this number could trigger moves in the single-currency.
The Euro will meanwhile likely be more interested in the outcomes of the EU summit on 28-29 June as to should provide more clarity on German Chancellor Merkel’s leadership.
The weekend meeting of EU states – note many refused to attend – to discuss migration confirmed just how unsettling the issue is for European politics.
No agreement was reached, suggesting the potential for no substantive meeting at this week’s summit, which could matter for Germany’s under-pressure Chancellor, and therefore the Euro.
“The lack of any agreement puts more pressure on German Chancellor Merkel’s coalition, which is threatening to come undone over the issue. It’s a potentially big EUR-negative,” says Gittler.
Merkel wants a European agreement that would see most asylum seekers who have already registered in other European countries turned away from the German border – a demand being made by her CSU coalition partner.
The lack of agreement on a European level will likely see Merkel strike individual accords, which could go some way in defusing the issue.
US Dollar: Housing Market
The Dollar is on the front-foot at the start of the new week with the currency subject to overall global investor sentiment, tending to benefit when trade tensions are ratcheted up by the country’s president as is the case now.
“A trade war would reduce US and global economic growth, increase business uncertainty and raise risk aversion. This would push the US Dollar stronger,” says Isaah Mhlanga with RMB in Johannesburg.
On the economic docket, we have new home sales out of the US at 15:00 and these should give a steer on how broader sentiment is faring in the United States. A reading of 667K is forecast for May, a beat might help the Dollar, a miss might see the recent underperformance of the Dollar extend.
Rand: Biased for Gains
RMB’s Mhlanga reckons that for the Rand this week, much will depend on overall sentiment and moves in the Dollar.
On this front, he is quite optimistic:
“The Rand has already weakened a lot and has since recovered, together with other EM currencies. As we have stressed before, local factors are neutral for the local unit. What really matters at this point in time is the value of the US dollar and EM risk sentiment. The US Dollar index failed to push through 95 and is shedding some of last week’s gains. This means that EM currencies and the rand are biased for gains as we start the week,” says Mhlanga.
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