Pound pushed down by Prime Minister uncertainty

Today's Highlights

• Pound pushed down by Prime Minister uncertainty

• Trade tensions bite US economy and Dollar

• Euro recovers as USD falls

Current Market Overview

Pound pushed down by Prime Minister uncertainty Sterling remains subdued after it was announced that 10 Conservative MPs would bid to become the next party leader and Prime Minister. The Pound has fallen as the risk of a Eurosceptic Prime Minister in the UK and a no deal Brexit has increased. Poor UK data added to the Pound's woes as a dramatic fall in car production and an easing of stockpiling by manufacturers meant that the economy shrank in April.

Gross Domestic Product (GDP) contracted by 0.4% from March, meaning that growth for the three months to April slowed to 0.3%. Industrial production fell by 2.7% and manufacturing output slowed by 4%. All in all, a disastrous set of figures, and this, combined with the political uncertainty, will ensure that the Pound will struggle to rally in a meaningful way until we have some clarity. Employment and average earnings data was released this morning, showing faster wage growth than expected, but slower employment growth. Continued uncertainty will dictate the near term direction of the Pound.

We have a raft of UK data this morning before a relatively quiet slate for the rest of the day.

Trade tensions bite US economy and Dollar

The US Dollar has weakened recently and could continue to fall. The US economy is slowing, Non-Farm Payrolls increased by only 75,000 on Friday; and March's job count was revised lower from 189,000 to 153,000. Average earnings were also slightly disappointing, only rising 3.1%. This week's inflation and retail sales data will be a key indicator for the Dollar – markets will keep a close eye on the results. The ongoing trade war with China and Mexico is beginning to impact on the overall economy and the uncertainty will weigh on asset prices and the US Dollar. Markets also expect the Federal Reserve to cut interest rates by the end of the year; this may be a little optimistic, but Federal Reserve Chair Powell has stated that they are monitoring events closely and will act appropriately to sustain expansion. For now, the US Dollar has a number of pressures with which to contend.

Euro recovers as USD falls

The Euro has bounced from its recent lows, assisted mainly by a weaker US Dollar as markets anticipate a cut in interest rates from the Federal Reserve. That correction may be short lived, however, as, according to the Finnish Central Bank Chief, Olli Rehn, the European Central Bank (ECB) is ready to use any of its monetary stimulus instruments to prop up confidence and growth. Rehn, a potential successor to Mario Draghi, went on to say that the ECB could cut rates, buy more bonds or tweak guidance to stimulate the economy. Everything is on the table. As interest rates are already below zero, the central bank may have to come up with something a little more imaginative and the Euro may be at the top of its range in the short term.