Dollar falls on soft US data, Theresa May resigns as PM
Some pretty weak economic data out of the US weighed on the US Dollar yesterday afternoon.
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UR/USD was able to break out of its recent range, briefly rising back above the 1.12 level this morning on increased bets that the Federal Reserve could consider cutting interest rates later in the year. This came off the back of some thoroughly underwhelming economic data releases in the US, namely worse-than-expected manufacturing and services data.

Markit’s US manufacturing PMI sank to just 50.6 in May from 52.6, while the services index came in at just 50.9 after investors had eyed an uptick to 53.2, its lowest level since 2016 (Figure 1). This points to a worrying sign of a slowdown in the world’s largest economy, which may be beginning to feel the pinch of the heightened tensions between the US and China and generally soft global growth.

Figure 1: US PMIs (2016 - 2019)

Source: Thomson Reuters Datastream Date: 24/05/2019
By contrast, currency traders didn’t seem too bothered about the slightly worse-than-expected PMI numbers released in the Eurozone yesterday morning. According to IFO President Fuest, trade war uncertainty is having a negative impact on business sentiment in the bloc, namely in Germany. This is unsurprising given Germany’s close trade links with China, particularly its manufacturing sector.

May to exit as Prime Minister on 7th June



The Pound briefly rallied, although quickly gave up all of its gains this morning on the news that Theresa May had resigned as UK Prime Minister. Increased calls for Theresa May to resign as PM has kept the UK currency firmly on the back foot so far this week, with a number of tier one media sources reporting that May was likely to stand down before she gets a chance to put her withdrawal agreement to another parliament vote. She will stay on as PM until 7th June, with her replacement to be appointed in the interim, likely the pro-Brexit Boris Johnson.

The key to Sterling will now be whether the new PM makes any headway in renegotiating a deal with the EU. If not, a no deal scenario will become increasingly likely and Sterling could be set for more weakness in the short term.

Amid the overbearing barrage of headlines out of Brexit, UK macroeconomic data has gone almost totally under the radar in the past few days. Retail sales data out this morning was better than the markets had anticipated, although sales still came in flat month-on-month in April. News that the main measure of consumer inflation had increased back above the Bank of England’s target earlier in the week (Figure 2) also provides some cause for encouragement. Yet, with no end to the Brexit saga in sight, it seems likely to us that the BoE will continue to remain on the sidelines when it comes to its next policy move, regardless of how the UK economy performs.

Figure 2: UK Inflation Rate (2016 - 2019)

Source: Thomson Reuters Datastream Date: 24/05/2019
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