Morning Report: 14 September 2018

September 14, 2018

GBP. Sterling found a boost of strength in yesterday’s afternoon session when measured against USD, but this looks more attributable to a period of dollar weakness than any reaction to the Bank of England’s announcements. The Bank of England convened to release their monetary policy decision yesterday, which unsurprisingly resulted in interest rates remaining at 0.75%. Whilst this was not a shock for markets, heavy references to growing Brexit uncertainty within the meeting minutes reinforced that Carney & co will be waiting for greater clarity on trade negotiations when assessing further monetary policy decisions. This was the base case for markets participants, who pushed back their expectations of a rate hike by the central bank into the latter part of next year, but sterling still experienced a minor slump in the immediate aftermath. Broad dollar weakness eventually drove GBPUSDs rally as investors await further Brexit news just like the Bank of England.

EUR. The European Central Bank’s inflation forecasts were held steady despite that the growth outlook had been adjusted downwards, which was enough for the euro to stage a successful rally and gain against USD for the fourth day in a row. ECB President Mario Draghi sounded unexpectedly optimistic as he explained that, for example, rising wage pressures have strengthened the confidence of the ECB in the stability of the inflation. Today sees the Eurozone Trade Balance at 9:00 BST, followed at 10:00 by Q2 Labour Costs.

USD. USD is heading for its worst week since February as the stories that gave strength to the greenback over the summer now seem to change their impact and suddenly start to become a drag on the global currency, like leaves changing their colour in autumn. August’s Consumer Price Index came in below expectation at 0.2%, which is the second inflation data miss this week after Producer Price growth unexpectedly showed a decline for the same time period on Wednesday. This dampens concerns somewhat that US inflation is about to run wild, which would force the Federal Reserve into hiking action. Additionally, after the first wave of trade tensions was broadly positive for USD, concerns rise about how an ongoing trade war can actually hurt the US economy, which is a dollar negative story. The week is far from over yet for the greenback, with Retail Sales and Import Prices at 13:30 BST, followed by the Capacity Utilisation Rate and the monthly Industrial Production figures at 14:15.

CAD. A NAFTA type agreement needs to be struck before the end of this month for it to be ratified by the US Congress before they take recess prior to the midterm elections. Uncertainty surrounding negotiations weighed on the loonie yesterday as it lagged the general G10 move against a weakening dollar. A slump in crude oil prices yesterday didn’t come as a saving grace to the loonie as WTI crude prices dipped their head back below $70 a barrel. No data releases are in the diary for the loonie today, and with Chrystia Freeland, the Canadian Foreign Minister, not returning to Washington further NAFTA news isn’t expected just yet.

FX elsewhere: The Central Bank of the Republic of Turkey staged an illustrative episode of “too little too early, too much too late” as it beat most expectations with a sudden and sharp rate hike of 625 basis points such that the main interest rate is now 24%. The response of the lira was relatively muted in comparison, however, as the currency only claimed back around 2% against USD after losing more than a third of its value in prior months. This was partially caused by the fact that uncertainty regarding central bank policy has already negatively impacted the economy to such an extent that this credit tightening may push the economy more towards a hard landing, suggesting that the rate hike was too late and its consequences will be severe in the longer run.

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