The single currency opens the day with slight losses against the dollar, when some markets in the region return from a long weekend for the Labor Day holiday. The narrative for European stocks is mixed this morning, following recent losses in the tech sector internationally. Despite the prevailing positive tone given the more accelerated advance of vaccines and the prospects for an economic reopening, the environment of global uncertainty continues to inject caution into the operations of the euro. The euro area contracted 0.6% in the first quarter of the year compared to the previous three months and, although the average expectation was of a 0.8% drop, the figure still places the bloc in a technical recession. Germany and Spain were the biggest draggers, with decreases of 1.7% and 0.5% respectively, while France exceeded expectations with an advance of 0.4%. Italy also contracted, with a quarterly decrease of 0.4%, although to a lesser extent than expected. Investors are now focused on the progress of vaccines and the prospects for normalizing access to their borders.
The US dollar traded weaker in the G10 yesterday, offsetting strong action on Friday that lined up with typical month-end flow. This morning, the dollar cut some of yesterday’s losses, leading broader gains across the entire G10 currency board. The calendar for the day included the reading of the ISM Manufacturing Purchasing Managers Index, which contracted to 60.7, from 64.7 in March. The fall was generalized this month, although employment and production registered the biggest setbacks. As markets generally expect growth and inflation indicators to print at elevated levels for the next period, market reaction to strong data prints has been limited in recent weeks. Conversely, any downside surprise may have a bigger impact on the US dollar, as it goes against expectations. Because of this, the markets will closely follow the most relevant and sensitive publications, such as the trade balance and factory and durable goods orders today, and non-farm payrolls next Friday. Beyond this, attention will be drawn to comments from Robert Kaplan and Mary Daly of the Federal Reserve.
The pound was the best performing currency in the entire G10 space yesterday, despite internal political issues regarding Prime Minister Boris Johnson’s possible violation of spending rules and the conservative party’s declining popularity in the US. surveys. This morning, instead, the greenback pushed the cable below its 50-day moving average. The meeting of the Bank of England and the Scottish elections on Thursday will be the focus of attention for the pound this week. On the first, speculative abounds as to whether or not the central bank will signal a reduction in its quantitative easing, with only a minority of experts anticipating that weekly purchases will be smoothed out as of Thursday’s meeting. However, given that the data do not show a definitive trend of what economic conditions look like after the de-escalation of measures, the decision is still controversial and probably premature. That is why we expect the Bank of England to delay such an initiative on its QE program until the May meeting.
The Mexican peso operates marginally below a critical level against the dollar, in a dynamic fundamentally motivated by the broader trend of the greenback at the beginning of the week. Local media report on a tragic accident in the Mexico City subway, where at least 20 people died and another 70 were injured. The economic calendar for the week will focus on the publication of inflation figures next Thursday, with expectations that the general intra-annual data will exceed the 6% threshold. Last week the economic result for the quarterly year ended in March was released, with a growth of 0.4% in relation to the previous quarter, above expectations of stagnation. Although moderate, the rebound in economic activity leaves some encouragement to Banco de México, indicating that the accelerated rise in prices could also be gaining strength from the underlying activity of the economy.