GBPUSD opens this morning slightly lower, in line with the broader G10 move as the US dollar goes bid on global growth concerns. However, sentiment around the pound likely took another hit from rising Brexit concerns after news reports state Prime Minister Johnson is set to sign off on plans to unilaterally scrap parts of the UK’s Brexit deal, which could end talks with Brussels and spark a trade war at a time when both economies are feeling the pressure from higher inflation. The move by Johnson has been walked back by Downing Street officials over the weekend as an “insurance policy” should trade negotiations with the EU fail. The legislation will aim to reduce border checks in the Irish sea, thus allowing free trade between Northern Ireland and the UK. However, this would require further legislation for a separate trade channel with the Republic of Ireland and for Northern Ireland to follow UK standards and tax rates. For now, the trade risk seems distant, but due to the impact it could have at a time when the UK faces the largest cost of living crisis in decades, the news will only act as a further dampener on sentiment. Partially outside of the political arena, focus will rest on the Bank of England’s Treasury Committee testimony that begins at 15:15 BST today.
After collapsing to multi-year lows last Thursday, the single currency remains well supported by cheap valuation this morning despite the broad US dollar bid. However, EURUSD traders will be acutely aware of the sharp moves lower once technical support levels are breached– Thursday’s trading session is a reminder of this. Today, the main focus for the euro outside of how broader markets trade the renewed growth risks is the European Commission’s economic forecast publication. The EU is set to cut its 2022 growth forecast from 4% to 2.7%, while raising its inflation projection from 3.5% to 6.1%.
After Friday’s risk rebound, the dollar resumes trading on the front foot this morning as events over the weekend thrust the precarious risk backdrop back into the limelight. Said events range from Finland and Sweden joining Nato, and Russia’s pledged retaliation, to a downgrade in the eurozone growth outlook by the EU and the possibility of the UK unilaterally withdrawing from the Northern Ireland. Further concerning news came out this morning from China, where growth data for April plunged further below economists’ expectations to highlight the growth impact of the lockdown measures. Retail sales fell 11.1% YoY, exceeding expectations of a 6.6% contraction, while industrial production, which underpinned the post-Covid recovery, fell 2.9% despite expectations of a slight gain. The activity data ultimately weighed on global risk sentiment due to concerns over global growth conditions, offsetting news that Shanghai will begin to partially reopen and that China’s housing market will be supported by a slight reduction to mortgage rates. Amid this macroeconomic backdrop, we expect FX traders to remain in a defensive position by holding the US dollar. Today, the economic calendar is light in the US, with just a speech from New York Fed President Williams at 13:55 BST standing out.
Improved risk sentiment strengthened the loonie on Friday as traders positioned themselves for the prospects of positive news over the weekend. Equity markets surged worldwide, with the S&P 500 rising 2.39% and the tech-focused NASDAQ index up 3.82%. The Canadian dollar appreciated by 1.06%, making it one of the stronger performers against the US dollar, all of which were higher beta currencies that respond strongly to broader market risk. Every G10 currency except the Japanese yen strengthened against the US dollar, creating an almost mirror opposite of Thursday’s trading. Helping the loonie further was the 4% rally in crude oil prices. This morning, however, the loonie has shed some of Friday’s gains as concerns over global growth conditions re-emerge. Today, out of Canada we get housing starts at 13:15 GMT / 08:15 ET, manufacturing sales and wholesale sales at 13:30 GMT / 08:30 ET. In the US, NY Fed president John Williams is set to speak at the Mortgage Bankers’ Association at 13:55 GMT / 08:55 ET.