Marknadsövervakning - 26th May 2020

UK retail sales fell 18.1% last month, and this led to GBP/USD falling around 0.5% last Friday. When looking at sterling, the market has to include the possibility of negative UK interest rates as well as the probability of a trade agreement or trade talks collapsing at the end of June. It also has to price in the news that the lockdown is being eased and shops will reopen on June 15th. We only have the release of CBI realized sales on Tuesday to try and illuminate the picture in a 4-day week. So, it could be up to other currencies’ direction to move the pound. UK-EU trade talks start again on June 1st. The two sides only have one month left before they have to decide whether to extend the transition period. It is unlikely that the UK will do this. The question is: Will the Prime Minister do as he has said and halt the talks to prepare for a no-deal Brexit?

The EU has to gain the approval of all 27 member states when agreeing the next fiscal support package. The Franco-German proposal has been well received by the market as well as many EU members. However, there are the so called ‘frugal four’ (Austria, Denmark, the Netherlands and Sweden) who have proposed that rather than grants for the package, countries should receive loans. EU Commission President, Von Der Leyen, will release the EU’s plans, which are expected to include huge borrowing on the capital markets today. There is much at stake.  A senior official in the Spanish Prime Minister’s office, Pedro Sanchez, said “if we get this wrong it will ruin the political atmosphere for decades, literally decades.” The first reading of EU CPI will be on Friday, and we expect an annual increase of 0.1%.

The US had a holiday yesterday, as did the UK. The country is being opened up and President Trump has said that if there is another spike, he will not close the economy down. Companies such as Hertz car rental are collapsing, and as such there is an argument for opening the country up as soon as possible. The issue is how to do it safely. There is also a constant stream of criticism of China by both Republicans and Democrats, and this will be a main theme of the Presidential election in November. Currently, the average of all polls is showing Biden leading the President with a 48% to 41% margin. This time 4 years ago Trump was in a similar situation against Hilary Clinton. However, there were many more undecided voters back then and Biden’s support has been steady. November is too far away for the election to be the main focus of the market, but if Biden continues with this lead the market will start to price in a Democrat Presidency. On the economic front, we have US GDP for release on Thursday with Fed Chair Powell speaking on Friday.

The Australian dollar has continued to stay supported, as the US equity markets have also stayed firm. However, as the Australian and Chinese relationship has started to show even more strains, it would not surprise if the AUD slipped lower. Private capital expenditure is released this Thursday. Meanwhile, South Africa took the opportunity to cut interest rates to by 0.5% to 3.75%. This caused the ZAR to strengthen as it was seen as a positive for the economy. However, we expect this strength to be temporary as the South African economy is still very weak.

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