EUR: Warning shots from Italy

China’s April activity data (industrial production and retail sales) disappointed and merely serves to muddy the argument over whether China is more or less likely to accept the terms of a trade deal dictated to it by Washington. The high fixing in USD/CNY, 6.8649, leaves CNH and CNY in a vulnerable position should the war of words continue. Away from trade, today should see a strong US April retail sales ex-autos figure, questioning whether the market is right to price 30 basis points of Fed easing by December. We still think the risk environment is fragile, but DXY may edge up to the 97.70 area and activity currencies stay on the soft side.

If the weak recovery in the eurozone, renewed global trade tensions and flattening yield curves were not already bad enough for the euro, it now has to contend with renewed populism out of Italy. Deputy Prime Minister Matteo Salvini said yesterday that he’s ready to break EU fiscal rules to get unemployment lower. This is a timely reminder of MEP elections on 23-26 May, where strong support for Salvini’s Northern League (polling currently at 32%) warns that he could try and break free from his unlikely coalition partner, 5SM, potentially prompting new elections in the autumn. Given this background, it’s unlikely that today’s 0.4% QoQ 1Q19 German GDP release will be enough to trigger a sustainable bounce in the EUR/USD. 1.1250/60 may well prove the top of the range for EUR/USD and we also expect EUR/JPY to drop towards a 1m target of 120.

It seems that cross-party Brexit talks have stalled and Prime Minister Theresa May will put her deal back to parliament in early June (right after what should be a humiliating set of MEP election results). Failure to pass the deal could well see May finally step down, opening the door for a more eurosceptic PM. Cable risks 1.2800 near tm.

CE4 release 1Q19 GDP today. We see downside risks to the Czech growth number (below CNB and MinFin forecasts of 2.4% and 2.7% respectively). This should add to the view that activity and inflation have peaked and leave long Czech koruna positions vulnerable. In contrast, Hungary could post 6% year-on-year growth, helped by industry. While on the surface that may seem a positive for the forint, we’re concerned that near -4% real rates in Hungary take a toll on the HUF and we retain a EUR/HUF target at 330. In Poland, GDP should soften a little and at today’s MPC meeting we doubt there’s any serious concern over the recent pick up in inflation and unchanged rates to end 2020 remains our base case. EUR/PLN risks 4.35 running into MEP elections on 23 May.