The pound is the currency to watch for the rest of this week as the UK government meets on Friday to decide on its final economic plan for Brexit. This includes tinderbox topics such as the UK’s single market access and Customs Union membership after Brexit in March 2019.
The pound stuck in the crosshairs
Upbeat Carney boosts the sterling
Mark Carney, Governor of the BOE, rather than dampen expectations of a rate hike, especially with so much Brexit uncertainty flying around, fired up the markets with an upbeat assessment of the UK economy and excusing the first quarter’s weak performance on weather-related issues in a recent speech. The fact that the market seems to have made up its mind that an August rate hike from the BOE is incoming, may have also tempered Carney’s more dovish instincts, which is pound positive in the short term. The BOE Governor was more concerned with Trump’s China tariffs and the impact on world trade, which suggests that Brexit concerns could take a backseat to Trump trade wars in the coming months.
Can the World Cup save the pound?
Where does this leave the pound? Life above $1.3250 for GBP/USD looks shaky in the near term, especially with Brexit risk and US non-farm payrolls on the horizon, even though a hawkish Carney could see an attempt at 1.3250 opening the way to 1.33. On the other hand, a dovish Carney combined with decent US labour market data could see the dollar roar back to life and send GBPUSD hurtling back towards 1.3150 then 1.3070 from late June. When it comes to the pound, we also can’t rule out the World Cup effect, could a victorious England in the next two weeks be positively correlated with currency performance? The boost it could give to the economy may lead to some uplift for the pound, but it’s best not to get too ahead of oneself when it comes to the England team and World Cup performance.
Trump tariffs could keep US stocks subdued
US indices were closed on Wednesday and put in a lacklustre performance on Tuesday. We expect them to come back to life as the US tariffs on Chinese goods come into effect on Friday. Trump has been quiet on this in recent days, mostly targeting European automakers, but a key development came from China on Tuesday when an official said that there would be no retaliatory tariffs on US goods. This seems to contradict what Beijing was saying in June, however, it could lessen any market nervousness as we lead up to Friday and protect US indices from further sharp losses in the near-term.
Trade wars leave the S&P 500 vulnerable
Any escalation in the trade war theme may cause the S&P 500 to drop back to the 2,650 level in the coming months. This can’t be ruled out, especially since the Citibank US economic data surprise index continues to drop, which has a good correlation to both the US 10-year Treasury yield and the S&P 500. With economic data appearing to top out at the same time as Trump’s tariffs look set to be expanded and the Fed is hiking interest rates, it could be a tough H2 for the US stock markets. In the next couple of days, expect investors to be nervy, as the deadline for US tariffs on Chinese goods gets closer.
In the immediate term, US labour market data is expected to show another healthy 200k rise for June. The unemployment rate is expected to remain steady at 3.8%, while annual hourly earnings are expected to tick up slightly to 2.8% from 2.7%. Any disappointment in the figures is likely to be blamed on Trump’s tariffs causing jitters in corporate America, which could trigger a larger than expected sell off in risk at the end of this week.