Morning Report: 14 June 2018

June 14, 2018

GBP. Sterling made minor gains against the dollar yesterday, despite two negative shocks coming throughout the trading day. Yesterday at 09:30 BST UK inflation data was released with the headline Consumer Price Index reading 2.4% YoY, showing no change from April, with Core CPI posting 2.1% YoY for May. The recent decline in inflation seems to have stabilised, just above the Bank of England’s 2.0% target. Producer Price Index data for May was also released, with input prices (prices for materials and fuels) rising 9.2% YoY and Output prices rising 2.9%. All industries provided upward contributions to output annual inflation with the largest contribution coming from petroleum products. Sterling bounced back above its opening level following this release until the Federal Reserve’s rate announcement pushed it back down. But with the markets already pricing in most of the US central banks moves yesterday, the downward move was quickly corrected, with sterling finishing the session just above its opening level against the dollar. Today at 09:30 BST Retail Sales data is released for May, with consumption being the largest component of the UK economy a positive release should fuel a sterling rally, with the median forecast expecting 0.5% growth MoM.

EUR. The euro made steady gains against both the dollar and sterling, in anticipation of the European Central Bank meeting later today. At 12:45 BST the ECB will announce its main refinancing rate, which currently sits at 0%, with a press conference to follow at 13:30. The last couple of ECB meetings have largely been exercises in can-kicking and denial, as the Governing Council has steered well clear of addressing the likelihood and nature of QE tapering. But given the looming deadline for September’s taper or extension crunch point, the ECB will unlikely be able to delay addressing QE extension any further at this week’s meeting. So far the Governing Council has tied policy normalisation to how confident it is about the convergence of inflation to target. Eurozone growth, which had already slowed at the time of the April meeting, has slowed further, and forward-looking indicators such as the ZEW survey remain negative. However, there is a vocal group of Governing Council members who are willing to look through the current growth slowdown and advocate for policy normalisation. In a recent speech, Peter Praet said that the ECB would assess continuing QE and cited accelerating German wage growth as evidence of a tightening labour market.

USD. The greenback posted losses against the whole G10 currency board yesterday. Last night the Federal Open Market Committee raised their target federal funds rate, their main interest rate and monetary policy tool, by 25 basis points to 1.75-2%. Along with this, the Central Bank revised its forward guidance dot plot, used by the Fed to give transparency on future monetary policy developments, to suggest the general consensus within the FOMC was to raise interest rates 4 times this year. However, despite these announcements theoretically suggesting a dollar rally, both EURUSD and GBPUSD stayed relatively muted in the immediate aftermath of the decisions as they came as no surprise to market participants. Money markets implied an 88% chance of a 25bp hike prior to the announcement with most analysts expecting 4 rate hikes in 2018 given the strong performance of the US economy as of late. Today at 13:30 BST the Import Price Index is released, with a 0.5% MoM increase forecast.

CAD. The loonie made some ground on the greenback yesterday following a surprise drop in US inventories causing oil prices to rise. US stockpiles of oil declined by 4.14 million barrels last week, the most since March, causing WTI crude to rally despite Russia and Saudi Arabia signalling their desire to unwind historic output limits following uncertain future supply. Next week’s OPEC meeting in Vienna will prove key for the future supply of oil, and market anticipation that supply will increase has caused oil to fall from post-2014 highs seen in May. Should oil prices fall due to the increase in supply from major oil exporting nations such as Saudi Arabia, the loonie may continue its current weak downward trend against the dollar.

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