Sterling extends sell-off on risk aversion, mixed UK labour data

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15 August 2018

thomasdodds

The Pound continued to lose ground against a broadly stronger US Dollar on Tuesday, briefly falling below the 1.27 mark this morning, as ongoing concerns over Turkey led to another risk off session.

T
uesday’s UK labour report was also very mixed. While there a was an encouraging sharp drop in unemployment to a fresh 43-year low 4.0%, an easing back in earnings growth provides the Bank of England with further reason to be cautious over the timing of its next interest rate hike. Wage growth including bonus slipped to 2.4% after economists eyed a 2.5% reading, exacerbating the Pound’s sell-off and extending the currency’s losses to over 3% in August alone.

This week could be a crucial one for the Pound, a currency in desperate need of some positive data surprises to reverse its recent Brexit induced sell-off. Inflation data out this morning came in as expected at 2.5%. Tomorrow’s retail sales could also prove important, although with selling pressure high, external risks may limit any potential gains.

Euro hits fresh 13 month low as external pressure builds

With financial markets still wary of the possibility of a full blown economic crisis in Turkey following the recent sell-off in the Lira, investors continued to sell the riskier Euro in favour of the US Dollar. EUR/USD remains under intense external pressure, falling by over half a percent again yesterday and slipping to a fresh thirteen month low.

The key to the Euro’s larger sell-off in relation to its peers lies in the exposure of European banks to Turkey. Investors are increasingly concerned that entities from Turkey that failed to hedge their currency risk may now have major problems repaying loans from European institutions. A weaker Lira automatically increases Turkey’s external debt obligations, which could conceivably lead to the country defaulting on many of its existing debt obligations. Couple that with increasing odds of a no Brexit deal and it’s no real surprise that the Euro was firmly on the back foot so far this month.

Turmoil in Turkey stokes US Dollar buying

As for the US Dollar, the currency shows no signs of letting up this week, despite a relatively sharp correction in the Lira yesterday. Risk of contagion in Europe means that the greenback is now the default safe-haven currency during the Turkey turmoil.

There were no major macroeconomic releases out of the US on Tuesday, with investors instead awaiting this afternoon’s retail sales numbers. With a very modest 0.1% increase pencilled in, we think that the bar is low for a positive surprise in the data that could provide additional wind in the sails of the Dollar’s rally.