Market Brief: Italian election, Brexit vision and trade wars!

02 Jul 2020

Emily Maguire

FX Dealing team

It’s worth beginning this week with a recap on Theresa May’s Brexit speech on Friday, as this was keenly anticipated throughout last week.

Today's data releases
  Key levels
09:30 EU Eurozone PMI    
09:30 UK PMI   Support Resistance
10:00 EU retail sales GBP/USD 1.3657 1.4068
14:45 US PMI GBP/EUR 1.1171 1.1508

Market overview

After a swift rearrangement to a London location due to the weather, the UK prime minister outlined how the government envisages Britain’s post-Brexit relationship with the EU. Mrs May explained that the deal must satisfy her five tests and she also ruled out a customs union between the UK and the EU on the grounds that this would remove Britain’s ability to strike trade deals with third-party countries. May seems to have secured a temporary reprieve from the infighting that’s dogged her premiership, with both the pro and anti-EU factions of her Conservative Party thinking they could see an advantage in the strategy she’s set out.
 
On Friday, we also heard from new Fed Chair Jerome Powell and markets were positive on the dollar following his relatively upbeat economic message. Previously, markets had been unsure of Powell’s monetary policy leanings, but these remarks were interpreted that he could be more hawkish compared to his predecessor Yellen. This could signal that FOMC members are looking to step up the pace of tightening through 2018, markets are currently pricing in the next rate rise for the 21st March FOMC meeting.
 
It looks as though Italian voters have punished mainstream parties for years of economic decline, rising taxes and a wave of immigration as both the populist Five Star Movement and the anti-immigrant, Eurosceptic Northern League seem to have made large gains in the general election. The final results are not expected until around midday today, but the exit polls suggest that no one party or bloc looks set to achieve enough seats for a majority, meaning Italy is heading for a hung parliament. Given the early estimates, Italy looks set for a protracted period of negotiations which could last for months. The markets worst-case scenario of a tie-up between the 5* party and the Lega Nord would, on current seat estimates, have sufficient seats for a majority, but it still remains very uncertain as to whether the two parties could overcome their differences to form a government.
 
In the US, president Donald Trump looks set to formally sign tariffs on steel and aluminium imports this week, in a move which is likely to trigger retaliation from the EU and China. Last week Trump announced that he would sign an order bringing in 25% tariffs on steel and 10% on aluminium. These would apply globally and cover all trading partners which has prompted fears of a trade war. The announcement provoked outrage from many countries and led the EU to warn that it would target iconic American brands, including Harley-Davidson, Trump responded on Twitter that “trade wars are good, and easy to win”. 
 

The day ahead

A number of British economic indicators will be published this week, including the UK Services PMI which is released this morning. Analysts are expecting a slight acceleration from January’s reading of 53.0. We also have the BRC Retail Sales Monitor (early Tuesday), the RICS housing survey (early Thursday) and the release of manufacturing, construction and trade figures (Friday). From the Eurozone, the key event will be Thursday’s ECB Governing Council meeting. No change in its stance is likely, but it will be closely watched for any comments on the tapering of its QE program. We also have policy statements from the Reserve Bank of Australia, the Bank of Canada and Bank of Japan over the course of the week. 

Thought of the day

Last night was the Oscars in Los Angeles and one of the most surprising winners was Kobe Bryant, the former NBA star. Bryant, alongside animation legend Glen Keane, won the Oscar for best animated short film for “Dear Basketball,” a cinematic take of a love letter he wrote to the game. Bryant’s foray into entertainment seems to be part of a wider trend for athletes to move outside of sport and spread their influence. In the same way, we often think of the FX markets in terms of Brexit, economic data, and interest rates alone but sometimes things outside our day-to-day like recent American stock market volatility can have a big impact. To discuss potential upcoming risk events including ones you might not already be considering, call the Dealing Desk today on 0800 055 6339.

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