Morning Report: 19 July 2018

July 19, 2018

GBP.  Yesterday’s release of the Consumer Price Index measure of inflation in June compounded souring sentiment over holding sterling. Expectations were high, with the lag from higher oil prices earlier in the year likely to boost the headline figure, along with a rebound in consumption. However, the release suggested no Month-on-Month change from May with the yearly figure not budging from 2.4% – below the median forecast of 2.6%. The lower-than-expected reading reduces pressure on the Bank of England to hike interest rates further, reducing the relative attractiveness of holding the pound. That said, the political risk associated with the pound subsided, as concerns over Theresa May’s ability to lead the Conservative party have, for now at least, diminished. Today, the newly appointed Brexit Secretary Dominic Raab will meet his EU counterpart Michel Barnier in Brussels following instructions from the EU for member states to up their contingency plans for a hard Brexit in light of the recent ongoings with May’s white paper. Also today, at 09:30 BST, figures on Retail Sales growth for June are released. A positive reading would all but confirm the Bank of England’s decision to hike to 0.75% in August, but a slight moderation in the headline year on year figure from 3.9% to 3.5% is expected. World Cup fever in the UK hasn’t come to the rescue for June’s retail sales, but will likely play a part in softening the declining growth from last month’s double-seasonality inflated reading.

EUR. Euro came under some broad, but mild, pressure yesterday while in general it remained far removed from the spotlight, except for a short moment when the soft Final Consumer Price Index was released. The Headline June CPI accelerated 2% in June, in line with expectations, but the core reading performed below expectations at 0.9%. That the core inflation refuses to pick up speed will help the doves in the European Central Bank Governing Council, who are reluctant to tighten monetary policy. They can self-contentedly point to this reading as it confirms their previous cautious assessments. Today it remains quiet on the European data front, with nothing but a tentative 10-year Spanish Bond auction scheduled in.

USD. USD was the worst performing of all dollars on the G10 currency board yesterday, with the New Zealand, Canadian and Australian dollar all performing better, though inroads were still made against GBP and EUR. Federal Reserve Chair Jerome Powell testified before the House was seen as slightly upbeat as he described the labour market as continuing to strengthen, with trade tariffs considered a risk, but no signs of a recession at the moment. Fed’s Beige book told a similar story, with manufacturers expressing concerns over tariffs and all districts reporting higher consumer spending and tight labour markets. Today sees the Philly Fed Manufacturing Index at 13:30 BST together with Unemployment Claims, FOMC member Quarles speaking at 14:00 and the CB leading index at 15:00.

CAD. The loonie fared relatively well yesterday in a day of cabinet reshuffling. Justin Trudeau, Canada’s Prime Minister, brought 5 new faces into his cabinet in the run-up to the 2019 re-election campaign. The reshuffle shows intent by the Canadian government to reduce trade dependence on the US and reassure concerns on border control, with the Deputy Conservative leader claiming this was an attempt to fix previously neglected concerns just before the federal election. Trump, not for the first time since he was elected president, shook up Canadian sentiment by commenting he is building a good report with the new Mexican President Andres Manuel Lopez Obrador and is considering prioritizing a bilateral trade deal with Mexico over one with Canada. The loonie, having had its fair share of these kinds of comments lately, shrugged it off for now, but if Trump’s NAFTA strategy continues on this line, more weakness may lie ahead for CAD. Today at 13:30 BST ADP Non-Farm Employment Change will be the most important Canadian data release for the day.

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