Although a sense of political uncertainty continues to hang over the UK in the wake of the snap general election the mood towards the Pound improved somewhat on Tuesday. With Theresa May looking set to secure support from the Democratic Unionist Party (DUP) to prop up a minority Conservative government some market anxiety has eased. However, the latest consumer price index showed an unexpected uptick in inflationary pressure on the year. If tomorrow’s wage data continues to lag behind inflation, squeezing real pay, the appeal of Sterling could weaken once again.
A dip in the German wholesale price index did little to encourage demand for the Euro this morning, suggesting that inflation in the Eurozone’s powerhouse economy is softening. The single currency also came under pressure thanks to an unexpected weakening of the German ZEW economic sentiment index. Altogether this undermined confidence in the health of the German economy, giving investors little reason to favour the Euro. Ahead of Thursday’s crunch Eurogroup meeting, which could see the disbursement of the next tranche of Greek bailout funds, EUR exchange rates are likely to remain muted.
While markets remain confident that the Federal Reserve will raise interest rates at its June policy meeting the US Dollar trended lower against many of the majors this morning. With an imminent rate hike already priced into the ‘Greenback’ its upside potential has been generally limited, particularly as concerns over the capability of the Trump administration has persisted. A lack of improvement in the NFIB small business optimism index added to the bearish mood of the US Dollar, increasing the likelihood of policymakers opting for a dovish hike on Wednesday and a slower overall pace of monetary tightening.
A sharp drop in the NAB business confidence index weighed heavily on the ‘Aussie’, undermining optimism in the outlook of the Australian economy. Coupled with a decline in credit card purchases for April this weaker showing suggests that domestic optimism is softening once again. Weaker levels of consumer spending could drag on economic activity, giving the Reserve Bank of Australia (RBA) further incentive to maintain a cautious policy outlook. If the Westpac consumer confidence index proves similarly disappointing the Australian Dollar could extend its losses further tonight.
New Zealand Dollar
In the absence of fresh domestic data the ‘Kiwi’ nevertheless benefitted from the relative weakness of its antipodean cousin. As forecasts point towards the first quarter current account balance demonstrating a return to a state of surplus the New Zealand Dollar could find further support overnight. However, if food prices are found to have contracted further in May worries over the inflationary outlook could see the ‘Kiwi’ return to a weaker footing.
Even though the issue of increasing US output continues to weigh on the oil market the price of Brent crude strengthened somewhat in the wake of the latest pledge from Saudi Arabia. As the major oil exporter vowed to make significant real supply cuts in July oil prices were encouraged a little higher. This boosted the commodity-correlated Canadian Dollar, although this latest recovery remains decidedly fragile in nature. Any uptick in US stockpiles could see CAD exchange rates slump tomorrow.
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