After the news broke that the Bank of England are keeping interest rates on hold yet again with a 7-2 split in favour of keeping rates the same, sterling fell across the board. Although we have yet to find a solution, the period of certainty going forward has meant that the Pound made some gains vs the Euro. However, although the Pound had a brief respite, the focus is likely to turn towards what will happen next with the Brexit negotiations which have weighed heavily on Sterling Euro exchange rates. We expect any gains for the pound to be fairly short-lived. The main thing to watch out for is Wednesday mornings inflation data. If this comes out worse than expected, further drops across the board are anticipated.
The Euro plummeted to a fresh 2018 low due to Dollar strength and concerns over Italian politics. This sent the currency pair EUR/USD to the lowest mark since December 2017. With the anti-establishment Five-Star Movement Party and The League looking on course to form a coalition government in Italy following March’s election, details on the coalition agreement have begun to leak. Even though both parties have eliminated any language that calls for an exit to the Euro, talk that the coalition agreement could involve a $250 billion sovereign debt forgiveness from the European Central Bank unnerved investors. The prospect of a new, untested government creates an uncertain backdrop in a country that is already suffering from weak growth and one of the highest debt-to-GDP ratios in the Euro-area.
The greenback shot higher last week following strong economic data. This data helped drive speculation that the Federal Reserve could aim for another 3 rate hikes this year. After starting the week slightly subdued after some dovish remarks from a non-voting member of the Fed, the US dollar spike returned as some positive economic data exceeded rate expectations.
The biggest USD gains came on Tuesday with the publication of the latest US retail sales figures. Robust sales growth in April appeared to be a sign that US consumer spending is heating up. The Markets grabbed on to this as an indicator that the federal reserve could set a more aggressive pace of monetary tightening this year. This in turn drove US treasury yields to a new seven-year high, further bolstering the appeal of the US dollar at the tail end of the week. Looking towards next week the greenback could be set for even further gains following the easing of trade tensions between the US and China, which is expected to be dollar-positive.