Post date: 20/08/2018 10:00
Attention continues to be focused on Turkey, as the Lira responds to political developments swinging wildly in both directions. While major G10 currencies ended the week not far from where they began, the volatility in Turkey spooked emerging market investors. The fact that the Lira managed to post a 6% rebound for the week, this was almost an afterthought for its emerging market peers, most of which ended the week significantly down against the US dollar.
This week will also be light in macroeconomic data. Political headlines from Turkey and trade disputes will be key factors in currency markets.
Labour market and inflation data last week came out largely as expected, as wages crawled up slightly faster than inflation and unemployment according to the ILO definition ticked down to a business cycle low of 4.0%. Neither this nor the stronger than expected retail sales numbers had much impact on Sterling, however, which continues to tread water on fears of a hard Brexit. We think these are currently overstated in the market and even modestly positive news from the negotiations could trigger a sharp relief rally in the currency.
The Euro managed to stabilize last week on little news, but market fears about European banks exposure to the Turkish crisis outweigh the improving tone in macroeconomic data over the past few weeks. This week, the ECB minutes and the flash PMI indices of business activity, both up on Thursday, will concentrate investors’ attention. Look for a rebound in the composite PMI to fuel a modest Euro rebound from current levels.
The only economic data of note last week was a stronger than expected retail sales print, which leaves the three,- six- and 12-month average all above the 0.5% level, signalling healthy consumer spending and confirming that a downturn in the US is nowhere in sight. Next week will be likewise light on the economic front, but the minutes from the last meeting of the Federal Reserve will be released Wednesday. We expect no change in either the positive outlook for the US economy nor the continued appropriateness of the current gradual approach to interest rate increases