- UK elections front and center
- Will the ECB change course?
- Trouble in the gulf
- Chinese services boost AUD
We’re kicking off quite a busy week for major currencies between central bank meetings and geopolitical events. UK elections on Thursday arguably carry the most risk given the increase in implied volatility which indicates a downside bias for GBP. The results of the election will weigh heavily on the scope of Brexit negotiations which begin June 19th. Increasingly narrow polling figures will continue to weigh on the sterling outlook, and if Theresa May fails to gain a majority in Parliament resulting in a coalition or minority government, we would expect the pound to take a significant move lower.
Much of the euro’s focus sits with the ECB meeting this week. Investors continue to call for a more hawkish tilt from the bank, and are looking for even the tiniest morsel to satiate their hunger. If the ECB changes to a more neutral stance on the risk outlook or hints towards the exit path from their highly accommodative policy, this would be a euro positive. Their calls may seem more justified after Eurozone PMI held at six-year high in May, however we would note that ECB President Draghi has been quite cautious of late, and may be loath to change policy with so much geopolitical risk on the Brexit front.
Saudi Arabia is leading a push with four other gulf nations to isolate Qatar. Citing Qatar’s support of extremists and purportedly conspiring with Iran, Bahrain, Egypt, the UAE, and Yemen have joined the Saudis in ostracizing Qatar. The five countries have not only severed diplomatic and economic ties, but are blocking all travel in and out of Qatar and notified Qatari citizens that they must leave. While oil initially spiked on this announcement, we have seen those gains taper as investors do not anticipate that this will have much of an impact on supply. CAD also gave up overnight gains against the dollar and now sits flat.
Aussie dollar climbed through the overnight session, bolstered by positive PMI data out of China. China’s services sector is growing at its fastest pace since January. IHS Markit’s Caixin Purchasing Manager’s Index noted that the strong pickup in service sector growth “reflected a quicker increase in total new businesses,” however, we are cautious on how much this expansion will translate into an economic boost for Australia. Manufacturers only saw a “marginal rise in production” as they continue to reduce the number of employees. Goods producers also saw the slowest increase in output in eleven months.
EURUSD: Euro slightly lower as many European nations, including France and Germany, observe a bank holiday.
GBPUSD: Sterling managed to recover from overnight lows following the London Bridge attack.
AUDUSD: Aussie dollar enjoying a push higher after Chinese PMI data showed services expanding at the fastest pace since January.
USDCAD: CAD flat, erasing gains against the USD as oil prices fluctuate on tensions in the Persian Gulf.
USDJPY: the yen trading mostly flat against the dollar, but we may see risk-trading resume ahead of the UK election on Thursday.