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Posted by portugalpress on June 01, 2018

The end of last week brought two important and apparently contradictory UK ecostats which meant the pound had a mixed reaction. First up was April's retail sales, which were supposed to have increased by a monthly 0.7%. It turned out that they actually went up by 1.6%, making the annual rise 1.4% instead of the forecast 0.1%. Then came a reaffirmation that Britain's gross domestic product did indeed expand by just 0.1% in the first quarter, in other words hardly at all.

Predictably, sterling enjoyed a positive reaction to the retail sales figures and lost ground on the GDP data. Despite ongoing rumblings relating to Brexit, there was so much political drama elsewhere in the world that the pound has managed to emerge relatively unscathed, although the impact of the new trade tariffs from the US now need to be factored in, having taken effect today.

The euro has been struggling due to the uncertainty in Italy. President Mattarella appointed Carlo Cottarelli as Prime Minister but made it clear this was a temporary position and another election could follow as soon as August. Investors are nervous that the next election could be fought along pro/anti-EU lines, and that the president's intervention could strengthen the anti-establishment vote. Were Italy's next government to seek to leave the single currency, the EU would face much more of an existential crisis than it does with Brexit. The political situation has already sent Italian government borrowing costs higher and prompted Moody's credit rating agency to put the country on negative watch. Despite these concerns, euroland showed some resilience despite ecostats suggesting softer consumer confidence in Switzerland and Italy. Except for German retail sales, which increased by a monthly 2.3%, the Euroland ecostats were not brilliant but the EC confidence measures were reasonably good and none of the other numbers was bad enough to get in the way of the euro's recovery after those initial wobbles. The swift retaliation of the EU to President Trumps’ new trade tariffs likely to have an impact across the currency market and the euro may not be so quick to slough off the impact of however this trade war plays out.

It was set to be a quiet week for the US dollar with the only ecostats available showing stronger manufacturing activity in the Fed's Dallas region and a 6.8% increase in US metropolitan house prices. However, President Trump’s decision to levy an import tax on steel and aluminium from the EU, Canada and Mexico has been met by furious criticism. It has sparked the very real possibility tit-for-tat tariffs on the US on a range of good. While Trump stated the move was made to ensure national security, his move was seen as not only protectionist but potentially, as highlighted by French President Emmanuel Macron in a conversation with Mr Trump the US move was "illegal". Justin Trudeau, the Canadian Prime Minister, equally firmly rejected the claim that his country posed a national security threat to the US. Nor is the criticism simply arising from the countries which will feel the impact of this move; House Speaker Paul Ryan, the most influential Republican in Congress, said the move "targets America's allies when we should be working with them to address the unfair trading practices of countries like China". This looks to be a story that will unfold in the coming weeks; it may have been a definitive move but both the fallout and any rollback on the initial position may take some time.

Other than the trade drama, Canada enjoyed a positive week. As expected, the Bank of Canada kept its benchmark interest rate unchanged at 1.25% for a fifth month. However, the language of its statement implied that an increase is in the offing, perhaps in July. The rate outlook no longer talked about policy being tightened "cautiously" and "over time", though it did still contain the word "gradual". This allowed the Loonie to become a top performer mid-week.

It has been relatively quiet down under – although with such large scale geo-political and domestic drama elsewhere, this is no surprise. The only data from Australia showed building permit issuance falling by a monthly 5.0%, but this only briefly dented the Aussie.

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