Foreign Exchange Report - 5.12.2024

The Euro weakened against a rising Dollar on Monday, as investors expressed concerns over political events in France. Jordan Bardella, president of France's far-right National Rally (RN) party, stated on Monday that the party is likely to support a no-confidence motion against the government in the coming days unless a “last-minute miracle” occurs. The increasing uncertainty surrounding France's budget caused the risk premium on the government's bonds to reach its highest level in over 12 years last week. As a result, the single currency dropped 0.55% to $1.0515, while the Dollar index, measuring the currency against six major peers, rose 0.46% to 106.28. 

Whereas the GBP/EUR exchange rate is rising at the start of the new week and may be poised to challenge the 2024 highs in the coming days, Pound Sterling Live reports. Indeed, the Pound-Euro exchange rate is currently at 1.2058, positioning it above the upper band of the post-September range, indicating the development of technical momentum. The clear goal from this point is a retest of the 2024 high at 1.21. That said, the exchange rate has not managed to close above 1.2025 on a sustained basis in 2024, and there may be rising selling pressure on the Pound at these levels. Certainly, the approval of the French budget could present a significant downside risk for the pair, potentially pulling it back into the 1.2025-1.1945 range once more.

Elsewhere, the GBP/USD pair may face renewed pressure as a recent rally driven by relief fades, with new discussions about Trump and upcoming US data drawing attention. Over the weekend, President-elect Donald Trump's renewed tariff threats are boosting the Dollar at the start of the week. As a result, the Pound to Dollar exchange rate (GBP/USD) is lower at 1.2696 on Monday, reflecting the broader USD rally following Trump's warning of a 100% tariff on BRIC countries. “The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is over. We require a commitment from these countries that they will neither create a new BRICS currency, nor back any other currency to replace the mighty US Dollar or, they will face 100% tariffs,” Trump stated.

Moving to China, the Yuan slipped to a four-month low on Monday, as concerns over tariff threats and mixed purchasing managers' index (PMI) data raised fears that China's economy may require further policy support. The onshore Yuan dropped to 7.2675 per Dollar, its lowest level since 24th July, despite a private manufacturing survey revealing that China's factory activity grew at the fastest pace in five months in November, Reuters reports. The Caixin/S&P Global survey data, which showed a modest improvement, followed the release of the official manufacturing PMI, but was overshadowed by a worse-than-expected non-manufacturing PMI, covering construction and services, over the weekend. The mixed signals from the official PMI indicated the need for further policy support, putting the Yuan in a difficult position due to ongoing US tariff risks, according to Paul Mackel, Global Head of FX Research at HSBC. Before the market opening, the People's Bank of China set the midpoint rate, within which the Yuan is permitted to trade in a 2% band, at 7.1865 per Dollar, 519 pips stronger than an estimate by Reuters news agency. The spot Yuan opened at 7.2450 per Dollar and was last trading 170 pips lower than the previous session's close at 7.265 at the time of writing, 1.09% weaker than the midpoint. Whereas the offshore Yuan was trading at 7.2756 per Dollar, down about 0.35% in Asian trade.

In South Africa, the Rand weakened early on Monday, ahead of a purchasing managers' index (PMI) survey for the domestic manufacturing sector. At the time of writing the Rand was trading at 18.15 against the Dollar, 0.64% lower than its previous close. Meanwhile, South Africa's benchmark 2030 government bond declined in early trading, with the yield rising by 4.5 basis points to 8.96%.

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