This morning’s session has been a fairly muted one in the G10 FX space as a whole, but especially so for the pound as it sits marginally higher against a broadly weaker US dollar. The pound has been under some pressure this morning, potentially due to the news of fresh variants being found in the North of England, but we remain constructive of sterling despite this news and believe markets are just awaiting fresh UK data to confirm the pricing of GBP’s next leg higher. Positioning in futures markets last week confirmed this view that sterling is currently losing the boost from positive sentiment and in need of robust data to continue the rally. Despite non-commercial traders net selling $0.1bn of USD contracts last week, data still saw a net decrease of $0.3bn in GBP long futures. Futures data tends to be a lagged sentiment index, but arguably confirms sterling’s inability to break fresh ground higher last week as it remains just shy of February’s high. This week, the data calendar is incredibly light for the pound with commentary from Bank of England members sitting as the most notable events. Today, BoE Governor Andrew Bailey is joined by fellow MPC members Jon Cunliffe, Andy Haldane and Michael Saunders as they testify in front of the Parliament’s Treasury Committee at 15:30 BST. Later on in the week, BoE member Silvana Tenreyro gives a speech on the ‘Economic Challenges from the Pandemic’ with Gertjan Vlieghe speaking at the University of Bath on ‘What government bond yields can tell us about future growth and inflation’. Today, sterling will be driven by broader market developments and general sentiment.
After feeling the brunt of a strong set of US PMIs on Friday, EURUSD is retracing the losses this morning as the broad dollar index trades softer and market sentiment remains buoyant. This week, the euro’s focus will remain on restrictions being eased across the trading bloc while data is set to show rising inflation in France and improving business sentiment in Germany, while labour market, GDP, and retail sales data out of Sweden is set to show the nation’s resilience. Tonight’s EU summit dinner was set to discuss relations with Britain and Russia, but events over the weekend mean the attention of EU leaders will now shift to the level of sanctions that will be imposed on Belarus after a flight from Greece to Lithuania was diverted by a fighter jet to Minsk. Once landed, Raman Patesevich, a critic of President Lukashenko, was arrested at the airport before the plane was allowed to continue its journey to Lithuania. There has been little spill-over in risk appetite to the CEE space, with both the Polish zloty and Hungarian forint trading higher against the euro and dollar this morning, but the FX implications of the increase in international tensions may come to the fore depending on how long the saga goes on for. With little scheduled for today’s session in terms of economic events, markets will keep a close eye on the Patesevich story along with broader FX market developments.
The US dollar jumped back into life on Friday as the US composite PMI reading printed a fresh high at 68.1 in May, marking a 4.6 point rally relative to April’s reading. The data points reminded markets of how robust the US economic recovery is, with both the manufacturing and services indices outstripping expectations. Most of the gain in the composite index was driven by improving service sector activity, with the services PMI rising 5.4 points from 64.7 to 70.1. Demand is gathering pace as the recovery from the pandemic propels long-depressed service providers, particularly in leisure and travel. While in the manufacturing sector, its own PMI climbed to a record at 61.5, although shortages in materials and rising prices also caused backlogs in work to climb to a series high too. Much of this sentiment has since faded over the weekend, with the DXY index falling 0.11% over the course of this morning’s session. This week is fairly light for headline US data, with durable goods data released on Thursday at 13:30 BST and April’s PCE inflation data out on Friday at the same time.
The loonie continues to sit in the limelight within the G10 space as the currency trades near a six-year high and non-commercial futures, a good measure of market sentiment, saw a net increase in CAD longs of $0.6bn last week. On Friday, retail sales data hit a snag in April as receipts fell 5.1% as major provinces introduced stricter lockdown measures. The contraction in retail sales as the services sector was shut down resulted in the past two months worth of gains being reversed. However, this did little to offset optimism in the loonie as traders already baked in the negative economic impact the latest set of lockdown measures inflicted and instead continue to look towards a robust economic recovery once a flat Q2 elapses. Today, with the dollar broadly weakening and crude oil recovering, the loonie sits 0.07% higher.