Morning Report: 22 June 2018

June 22, 2018

GBP.  Sterling made some much-needed gains against the dollar yesterday after carving out fresh lows for the year over the past few days. A change in voting behaviour from the Bank of England’s Chief Economist, Andy Haldane who voted for rates to increase, started sterling’s rally yesterday. The confidence with which the MPC has made this judgement, and looked past the shadier patches of UK data, suggests that the committee is developing a mild hiking bias. The latest meeting minutes saw the Monetary Policy Committee looks through negative data such as subdued services inflation and lacklustre business investment, whereas a more dovish committee would’ve pointed to this in order to explain their decision to hold. This suggests a hawkish bias to the committee has started to emerge and the markets 68% implied probability of an August hike now looks well founded.

EUR. Euro proved to be the comeback kid of the G10 currency board yesterday with a fierce rally against USD after an initial slump during the morning hours. The appointment of the two eurosceptics on important parliamentary committees in Italy increased political risk, which first put Italian government bonds under pressure and afterwards dragged on the euro. Alberto Bagnai was appointed to head the Finance Committee of the Senate and Claudio Borghi secured the leadership position of the Budget Committee in the lower house of parliament. The primary driver of the afternoon euro rally seems hard to pin down, but likely candidates are abound and a combination of factors may have been at play here as well. Profit taking after a main technical level was unsuccessfully tested may be one, with US data being weak being another. Additionally, Greece’s Eurozone lenders handed the country some further breathing space by easing some of the repayment terms the country faces on its debt. Today sees Flash French Purchasing Manager Indices at 8:00 BST, followed by their German and Eurozone equivalent at 8:30 and 9:00 respectively. These releases should give us some insights into how the Eurozone economy is likely to develop over the summer.

USD. The US dollar came under pressure yesterday during the afternoon and still appears a bit groggy this morning, although a fresh 11 month high on the DXY dollar index was still booked yesterday morning. The Philly Fed Manufacturing Index came in way below expectations at 19.9 in June, while also the Conference Board Leading Index showed itself from its soft side for May with a growth of merely 0.2%. This set off a patch of dollar weakness in the afternoon of yesterday’s session, seeing DXY closing far lower than the highs reached that day.  Meanwhile, trade tensions refuse to abide, with a Chinese spokesperson stating that China is “fully prepared” to respond to any new US tariff packages.

CAD. With USDCAD carving out fresh 11-month highs every day this week, the loonie has started today’s session on the offensive ahead of OPEC’s meeting in Vienna and Consumer Price Index Inflation measure released at 13:30 BST. Inflation is expected to increase for May from 2.2% to 2.6%, whilst the Bank of Canada’s multiple Core CPI measures are expected to be unchanged. Should Core CPI post a positive surprise, markets expectations of a rate hike from the Bank of Canada in July will certainly increase, with the market already pricing in a 64.7% probability for a hike. Rhetoric between Saudi Arabia and Iran over production increases has seemingly died down ahead of today’s OPEC meeting, with reports suggesting a 1 million barrel per day increase has been agreed on by all parties. This level of increase should just cover Q3’s expected demand increase, which should keep oil prices at this sustained higher level.

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