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Week Ahead: May Quits, EU Elections and Trade Wars

This week has been a volatile one for the markets, with stocks and especially crude oil taking a nose dive after a sharp escalation in the US-China trade dispute the week before, while in the FX markets haven currencies such as the Japanese yen and Swiss franc were underpinned and risk-sensitive commodity dollars were undermined. The downbeat British pound whipsawed on Friday in reaction to news UK Prime Minister Theresa May has decided to step down as Conservative leader after she lost the support of her own party, with a record number of MPs quitting in protest to how Brexit was being handled over the past three years.

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In the week ahead, the pound and UK politics will surely remain in sharper focus. May’s departure means more uncertainty over Brexit, and whoever replaces her will have an almost impossible job to do. The pound will bounce here and there, but won’t be going anywhere far, fast. A lot now depends on who will become the new Tory leader. Someone like former London Mayor Boris Johnson, who is bookies’ favourite to replace May, could be bad for the pound. A hard-line Brexiteer could re-negotiate unfavourable terms with the EU or push for a no-deal exit from the union.  

The US-China trade dispute will continue to remain the main focal point next week, even if there’s been little fresh news in this regard this week. Any further retaliation from China will surely knock risky assets. Meanwhile next week’s economic calendar is light but we will still have a few potentially market moving events to look forward to.

Sunday/Monday: The European Parliamentary Elections will have concluded by Sunday and the outcome of the votes could see the euro gap at the open on Sunday night, meaning it could be an interesting Asian session on Monday. However, with the bank holidays in the UK and US, the rest of the day could well be very quiet indeed.

Tuesday: There isn’t a lot on the agenda on Tuesday either, with the exception of Swiss GDP and a couple of consumer sentiment indicators from Germany (GfK Consumer Climate) and the US (CB Consumer Confidence) to look forward to.

Wednesday: The start of Wednesday’s session could be a busy one for the New Zealand dollar. As well as the closely-watched ANZ Business Confidence barometer, we will also have the Reserve Bank New Zealand’s Financial Stability Report (FSR), and a corresponding speech by Governor Adrian Orr, who will be testifying about the FSR before the Parliament Select Committee, in Wellington. The day’s other key event is the Bank of Canada’s monetary policy decision. The BOC is highly unlikely to make any changes to interest rates after the recent hikes. In fact, the market is increasingly pricing in a rate cut amid signs of slowing growth and global trade tensions. According to a poll by Reuters, there is a 40% chance of rate cut by end-2020.

Thursday: The New Zealand dollar will remain in focus on Thursday with the release of the nation’s budget. We will also the latest Building Approvals and Private Capital Expenditure data from Australia on Thursday, providing plenty of volatility for the AUD/NZD cross. Ascension Day in Germany, France and Switzerland probably means the European session will be a quiet one. However, North American dollars could be in for a volatile day due to the publication of US preliminary GDP (second estimate) among a few other second-tier macro pointers. The Canadian dollar could be impacted by volatility in oil prices, which may move in reaction to the latest US inventories data. US crude stockpiles have been rising again, pointing to increased supply and prices have fallen as a result. The Canadian dollar tends to track oil prices closely with crude being Canada’s top export commodity.

Friday: On the last day of the week we will have important data from the world’s second and third largest economies. The official Manufacturing PMI from China has risen back above the boom/bust level of 50.0, albeit only just at 50.1. It will be interesting to see how purchasing managers in the sector have responded in May given the escalation in trade war between the US and China. Meanwhile, from Japan we will have a batch of data releases including industrial production, retail sales and consumer confidence figures. The yen has become increasingly in demand owing to the perception it is a safe haven currency. If the Japanese numbers surprise to the upside then we could see further gains for the yen, meaning more weakness for XXX/JPY pairs. Also on Friday we will have German retail sales and CPI, meaning the euro could be in for some volatility. Meanwhile Friday’s North American data include US personal spending, consumer sentiment and Core PCE Price Index, as well as Canadian GDP.

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