Morning Report: 18 July 2018

July 18, 2018

GBP.  Yet another direct threat to Theresa May’s leadership materialised yesterday, as pro-Europe members of the Tory party sought to amend the current proposed customs bill, by stipulating that the UK would default to a Free Trade Agreement with the EU if no other deal was in place by January 21st 2019. This would essentially keep the UK adhering to the exact same current set of rules and regulations, but without any of the current political influence. Though this would remove the possibility of a knife-edge Brexit and would be considered a business-friendly amendment, both Conservative party whips and pro-Brexit factions in parliament colluded to help the government marginally defeat the amendment, by 307 votes to 301. Although this kept May’s Premiership intact for now, the ongoing perception of market risk for sterling overshadowed the vote and saw GBPUSD depreciate by nearly a whole percentage point yesterday. With Prime Ministerial Questions today at lunchtime, the bombardment of criticism towards May is unlikely to subside. The smog of uncertainty hanging over Parliament shadowed out a positive reading of unemployment data early in yesterday’s session, which saw the ILO’s measure of unemployment maintain historic lows at 4.2%. Today, the Consumer Price Index measure of inflation will be released at 09:30 BST and the real question is whether the data release has any effect on the market. CPI is expected to uptick on a Year-on-Year basis to 2.5%, whilst the core reading holds steady at 2.1%, suggesting the rise in inflation was due to the lagged impact from higher oil prices earlier in the year.

EUR. The euro remained under the radar yesterday but lost out to a broad dollar move. The EU and Japan held the ceremonial signing of the world’s biggest bilateral trade deal yesterday. As it was agreed in principle last year, the effect of the headline caused a muted response in the market. The euro started off yesterday’s session on the front foot, until Federal Reserve Chairman Jerome Powell testified in front on Senate. The broad dollar positive move that was sparked due to Powell’s testimony, along with sterling’s demise dampening the euro due to GBPEUR being range-bound, saw the euro post 0.43% losses yesterday. Today, the Eurozone-wide Consumer Price Index is released at 10:00 BST, with a slight uptick to 2% expected in the headline figure while core CPI holds steady at 1.0% for June.

USD. The Kiwi dollar was the only G10 currency to post gains against the greenback yesterday, with the main headlines centring on President Donald Trump retracting his previous day’s controversial denial of Russian involvement in the Presidential campaign, and Federal Reserve Chair Jerome Powell testifying on monetary policy in front of the Senate Banking Committee. As part of the Federal Reserve’s Semiannual Monetary Policy Report, Powell stated that he saw the need for further rate hikes given the strength of the economy, whilst downplaying the risks of a global trade war. Powell stated that the trade war risks would only be detrimental to the current global economic recovery if tariffs were long-term whilst reinforcing the risks to inflation and growth in the US remain balanced. Today, Powell testifies in front of the House Financial Services Committee, with the scripted statement likely unchanged, however, further questions regarding the central bank’s views to the risks of recovery are likely. Also, US crude inventories are released at 15:30 BST, which will prove a key insight to the production levels of WTI crude in a period of oil price moderation in light of reduced production risk.

CAD. The loonie depreciated nearly half a percentage point against the US dollar in a day that saw oil price pare recent losses only minutely. With little news related to Canada, the loonies losses nearly matched the general broad dollar move, with the DXY composite index rallying 0.46% whilst the loonie posted a 0.42% loss. Yesterday’s positive surprise in Manufacturing Sales in May did little to stem the loonies losses, despite a reading of 1.4% growth in May – up from April’s -1.1% reading.

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