Morning Report: 01 August 2018

August 1, 2018

GBP. Sterling’s rally early in yesterday’s session did not prove durable, retracing back to its opening level after a slump in the afternoon. With data being sparse, markets are preparing themselves for the Bank of England’s “Super Thursday” tomorrow with a fresh inflation report, a press conference and interest rate announcement, for which markets are pricing in a hike with a 90% degree of certainty. The only data intermezzo we have today, while we await the BoE decision on Thursday, will be the Manufacturing PMI figure at 9:30 BST which is expected to show a slight slump in the manufacturing sector’s growth in July.

EUR. Yesterday morning the euro initially carried on the rally it started against the dollar on Monday, but the single currency also came under pressure during the afternoon. The first reading of Q2 Gross Domestic Product showed that growth slowed to a pace of 0.3%- the lowest level in two years- with higher oil prices, and concerns over trade, being mentioned as the possible culprits. At the same moment, July’s first reading of consumer price growth was stronger than expected at an annualized rate of 2.1%, while the core reading recovered somewhat from last month’s dip, climbing back up to 1.1%. A tail risk may be that Eurozone growth further decelerates while inflation strengthens, which will put the European Central Bank in the dilemma of maintaining price stability by raising the rates or to support the economy with lower rates. For now, the higher inflation reading proved mostly supportive for the euro, boosting its value as it implies the ECB may be forced to increase the rates earlier than expected. This morning sees Final Manufacturing PMIs being released for several individual countries, culminating in a Eurozone-wide reading that will be published at 9:00 BST.

USD. Developments between the US and China’s ongoing trade war are back in the market spotlight, as yesterday’s news suggested that reports of US Treasury Secretary Steven Mnuchin being in talks with Chinese authorities appear to have been prematurely optimistic. In an interview with CNBC last week, Mnuchin suggested that trade talks are continuing quietly with China. However, this morning leaks suggest the White House is drawing up plans for a 25% tariff, up from the previous 10% threatened, on USD$200bn worth of Chinese imports. This is in conjunction with the further $16bn worth of tariffs, from the $50bn headline, being implemented midnight tonight CET. These developments come prior to the Federal Reserve’s meeting tonight. Tonight’s announcement comes without a press conference and updated member predictions, but market participants will be paying close attention to the language used in the monetary policy statement regarding tariffs impact on growth and inflation. Inflation indicators, released yesterday, suggesting price growth has remained relatively stable, but further inflationary pressures from increased tariffs may deserve recognition from the Fed. The dollar broadly rallied yesterday amid news that trade tensions declined, in conjunction with inflation holding steady at 2.2% and personal income’s growing at a stable 0.4%.

CAD. Yesterday’s data releases saw the loonie post the largest gains against the US dollar out of the G10 currencies, but oil price moderation stopped the loonie’s party early. Ironically, the impact of higher oil prices fuelled yesterday’s Gross Domestic Product reading for May, which suggested the Canadian economy grew by 0.5%. The positive surprise in data, which saw an increase in Canadian growth compared to the expected moderation, saw the loonie rally 0.23% against the dollar yesterday. Little data is released for the Canadian dollar for the rest of the week, and with a data-heavy week in the US, the recent downward trend USDCAD has embarked upon may be short-lived.

FX Elsewhere. Today at 10:00 BST, the Reserve Bank of India will release their monetary policy decision, with a statement due at 10:15. High levels of inflation above the 4% midpoint target, has fuelled widespread speculation that the RBI is set to raise the repo rate 25 basis points to 6.5% – the highest interest rate in two-years. Inflation was not only boosted by higher oil prices, India’s main import, but also by the government’s minimum support prices for crops and low rain levels for monsoon season. This is evidenced by the core CPI sitting above the headline rate at 6.35%. The rupee has fallen 7.00% this year, and the second interest rate hike by the RBI in 2018 will likely cause INR to pare some losses.

 

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