• Joel

Three Key Fundamentals This Week

1) EU Recovery Fund: Deal or no deal?

What should have been two days of EU negotiations on the Recovery Fund, that should have ended on Saturday, are about to stretch into their fourth. However, it appears that a breakthrough is imminent;

The frugals (who have been keen to reduce the amount that the Recovery Fund will dish out in the form of grants) have indicated that they are willing to accept total grants of EUR 390bln, only EUR 10bln away from the rest of the EU, who have indicated that they are not willing to go any lower than EUR 400bln in grants.

As a reminder, the original proposal was for EUR 500bln in grants and EUR 250bln in cheap loans, while the frugals initially only wanted EUR 300bln in grants. If a EUR 200bln gap has been closed to just EUR 10bln, it seems as though a deal is possible.

Not that total size is the only issue though, however. Conditionality attachments are also being debated; frugal nations want to make sure that the countries receiving the bulk of the grants (such as Spain and Italy) do not squander the money on bloated government and unsustainable programmes. Hence they are pushing for conditions to be attached to the spending.

Either way, the fact that after four days, EU leaders are still in negotiations indicates that there must be hope that a deal is near.

According to ING ,“a break above 1.1500 appears on the cards if a compromise is found today. There is a high chance that markets do not prove particularly sensitive to the details of the Fund but mostly focus on the benefits of the EU finally taking a step towards burden-sharing.”

In that sense, this is likely to be the dominant theme for EUR this week and may have a lasting impact on the medium-term direction of EURUSD.

2) Retail Sales Data out of Canada, Australia and the UK

Retail sales is one of the most important monthly data releases as far as FX markets are concerned, given that retail spending makes up a significant portion of total consumer spending, which in most developed market economies accounts for around 70% of the economy.

We have the latest retail sales data out of Canada, Australia and then the UK this week, and it could be a big moment for each of these countries’ respective currencies (CAD, AUD, GBP).

Starting with Canadian May retail sales, which we get at 1330BST/0830EDT on Tuesday; headline retail sales are seen rising some 20.0% M/M in May, while Core retail sales are seen rising a more modest, but still historically high 12.0%, following April’s 22% drop. The rise in retail sales represents and easing of lockdown measures in May.

Moving on to Australian June retail sales data on Wednesday in the early hours of the morning; no expectations have been posted just yet by major newswires, but there will likely be a significant easing in the M/M growth rate given May’s historically fast 16.9% M/M rise. This rise last month represented an easing of lockdowns in the country and took retail spending back to pre-Covid-19 levels.

Finally, we have retail sales out of the UK; headline retail sales are seen rising at a rate of 9% M/M in June, bringing the Y/Y change in retail sales further back from April -22.7% levels to -6.7%. After a comparatively slower easing of lockdowns in May (when you compare the UK to EU nations), the lockdowns easing really begun picking up pace in June. Hence, another big improvement in retail spending is expected in June, reflecting the ongoing return to normality in the UK economy. This trend ought to continue into July, and then likely start to tail off.

As is typically the case with retail sales data, better than expected data will lead to strength in the currency, while worse than expected data will lead to weakness.

3) UK, EU July PMIs

Sticking with the theme of data, we have more important data to consider at the end of the week in the form of preliminary July PMIs out of the Eurozone and UK.

Markets love these preliminary PMI data releases as they are seen as one of the timeliest updates on the state of the economy; Markit (the company who collects the data to create these PMIs) releases its results when it is only half way through collecting data for the month – this is literally a result of finance/investment folks putting pressure on the company to do an earlier release of its preliminary data.

Despite the fact that this data is released when only half of the data collection has been conducted (after all, we are only half way through the month), preliminary PMIs are still seen as quite a reliable gauge of changes in economic activity within different sectors.

Starting off with the Eurozone; Manufacturing PMI is seen rising to 49.6 from 48.5 in June, Services to 51.0 from 48.3 and the composite measure to 50.3. Survey data was strong in the EU in June, contributing to the ECB taking a slightly more optimistic, but still very cautious, outlook on the Eurozone economy at its policy meeting in the week just gone by. Markets will be interested to see whether this better than expected economic momentum can carry into July.

The Eurozone has kept the spread of the virus relatively under control (compared to the US, anyway), keeping second wave risks low for now.

However, the Eurozone economy is a big exporter, and continued weakness in the global economy will likely continue to weigh on the Eurozone economy going forward – the key next week will be to see whether Eurozone PMIs can break back into expansionary territory of above 50.0 (above this is typically associated with a sector in economic expansion).

Moving on to the UK; No expectations have yet been posted by major newswires, but note that UK PMI data showed a much faster than expected rate of recovery in June; so traders will hope to see this positive momentum continue int to July.

More specifically, manufacturing PMI rose above 50.0 last month for the first time since February, so traders will be keen to see whether manufacturing PMI held above 50 in July.

Services and composite PMI did not quite make it to 50 last month, but got close, coming in at 47.1 and 47.7 respectively. If they cross above 50 in July, this ought to be taken as a big GBP positive.

As with the retail sales data above, if this data comes in stronger than expected, that will typically trigger strength in the currency, while worse than expected data will lead to weakness.



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