Euro recovers as Italian coalition agreement ends political deadlock

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1 June 2018

thomasdodds

The Euro held its own against the US Dollar for the second straight day, putting it on course to end a run of six consecutive weekly losses, as news broke that a coalition government has been agreed in Italy.

F
ollowing renewed talks between the two populist parties, Giuseppe Conte will be sworn in as Prime Minister, a matter of days after resigning from the post. In the end, both Five Star Movement and the League, accepted the President’s choice to veto their original nomination for finance minister, instead appointing pro-Europe Giovanni Tria to the role. This ends a period of almost three months without a government, with investors breathing a sigh of relief that fresh elections in the autumn will likely be avoided.

With calm returning to the political scene, currency markets will now refocus their attention on the relative strength of the Eurozone and US economies. This afternoon’s US nonfarm payrolls report, seen as the single most important economic data release on the economic calendar, is likely to prove a market mover. Consensus is for a healthy job creation number around the 190k mark when released at 13:30 BST. Arguably of more importance, we think that any sign of an acceleration in wage growth could provide a catalyst for a recommencing in the US Dollar rally.

Other than that, investors will also be keeping one eye on a speech from Fed member Kashkari, seen as one of the more dovish members currently sitting on the FOMC.

UK manufacturing PMI beats expectations in May

Amid a lack of major macroeconomic data releases, the Pound spent much of yesterday’s trading session fairly range bound around the 1.33 mark against the US Dollar. A second straight month of losses means that the Pound is now trading in excess of 7% lower than its mid-April peak.

This morning’s business activity manufacturing PMI surprised to the upside, although the sectors relatively small contribution to overall GDP meant that it was mostly overlooked by currency traders. The index rose to 54.4 from the 53.5 consensus, albeit remaining comfortably short of the multi-year highs recorded at the back end of last year.

Tuesday’s much more significant services PMI will no doubt prove a bigger market mover for Sterling next week. In the meantime, we expect the Pound to trade almost exclusively on events elsewhere today, primarily this afternoon’s US labour report.