Morning Report: 17 August 2018

August 17, 2018

GBP. Yesterday’s release of Retail Sales surprised to the upside, to say the least. With the median forecast for July’s reading suggesting Retail Sales would grow 2.9% YoY, the reading of 3.5% gave sterling some short-lived relief from the morning dollar pressure. Eventually, as the dollar rally unwound, sterling began to rally above its open and ended the day in the green against the greenback. The release of Retail Sales data yesterday capped off a busy week of top-tier data for sterling, which normally has a large effect on GBPUSD’s price action, but Turkey and the dollar rally overshadowed the release of inflation and labour market data. Ultimately, despite unemployment falling to 4.0% and inflation rising to 2.5%, along with strong retail sales, GBPUSD remains down 0.43% so far this week.

EUR. Measures in Turkey to discourage short selling offered some short-term relief to the Turkish lira, of which euro benefitted as the fears of contagion from the Turkish currency crisis to European banks diminished. The spread between Italian and German 2-year yields often used to gauge the difference in risk premiums for the government debt of both countries, diminished a bit after hitting 2% on Wednesday. Since the new Italian government signalled this week its new budget will not respect EU budget rules, concerns over the serviceability of Italian government debts has steadily increased. Today sees the Eurozone Current Account at 9:00 BST and Final Consumer Price Index at 10:00 BST.

USD. The greenback went into the red yesterday after plans for new trade talks with China eased the trade tensions that had boosted the dollar over the last few weeks. Previously it functioned as a safe haven in this context, but these trades unwound somewhat yesterday. The intended trade talks between the US and China will be the first between the blocs in two months and the fact that just the news of a meeting sets markets in motion indicates this topic is still very important for FX. The Philly Fed Manufacturing Index that came out yesterday was slightly soft at 11.9, with manufacturers noting continued price increases for inputs and the products they manufacture themselves. This fits into the narrative of a tight economy and import tariffs driving up prices, though it is not clear from the survey responses at this point which of the two has a bigger impact on price growth. Today at 15:00 BST sees the University of Michigan Preliminary Consumer Sentiment.

CAD. The loonie came under pressure yesterday against most G10 currencies and couldn’t profit from the improved sentiment around trade now China and the US are set for new talks, while also WTI crude oil prices strengthened a little. Meanwhile, Prime Minister Justin Trudeau denied rumours of an earlier election this autumn. Such an election would take place as Trudeau’s centre-left government has recently come under pressure on issues of trade and immigration. The fact Trudeau felt the need to deny these rumours is an indicator a shift is taking place in the Canadian political landscape, with political uncertainty potentially not necessarily being helpful as a new NAFTA agreement remains under negotiation.

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