Morning Report: 11 June 2018

June 11, 2018

GBP Sterling contained its losses against USD fairly well on Friday, making gains against the euro. With a light data calendar last week, Friday’s main news came from Brussels where the EU’s chief Brexit negotiator, Michel Barnier, rejected the idea of applying a “backstop” solution to the whole of the UK. The controversial safety net, applied if no solution bar a hard-border is agreed upon by 2021, cannot be applied to the whole of the UK said Barnier, claiming that UK Prime Minister Theresa May’s plans “raises more questions than answers”, and that goods travelling across the Irish sea would need checks applied, effectively separating Northern Ireland, to keep it within the EU customs union. The light data calendar last week has paved the way for a cluttered one for sterling this week, with a plethora of top-tier data including unemployment data on Tuesday, inflation data on Wednesday and Retail Sales on Thursday. Last week’s Services Purchasing Managers Index reported that firms are raising wages due to a tight labour market – it will be interesting to see if this has filtered into May’s inflation reading.

EUR The single currency posted gains against the dollar last week, despite losing ground on Friday. On Friday, German industrial production fell 1.0% month-on-month, below the consensus for a 0.3% rise. A hawkish hold is expected for the European Central Bank meeting on Thursday by many a market participant after ECB’s Chief Economist Peter Praet told media last week that the end of the Asset Purchasing Program may very well be rather “sooner than later”. After headline inflation hit the ECB inflation target of close to, but just below 2%, in May with 1.9% it seems like little could go wrong for the hawks within the Governing Council. Still, persistently soft Eurozone data, uncertainty about the fiscal plans of the new Italian government and increasing global trade tensions may very well push the APP tapering decision forward to the next ECB meeting in July.

USD The dollar lost out to the G10 currency board last week as a swathe of risk on moves took place, but pared its losses on Friday. The main story on Friday, which continued over the weekend, was the breakdown in relations between US President Trump and his G7 counterparts in Quebec. With heightened rhetoric in the build-up to the G7 summit, the US’s closest allies voiced their disapproval of the “America First” stance taken by Trump- evidenced by steel and aluminium tariffs his administration has imposed- and subsequently, the summit did not disappoint in drama. Trump left the summit early on Saturday and instructed his officials to not sign the G7 joint statement, whilst concurrently threatening to impose more tariffs, mainly on automobiles. Trump left the summit and flew to Singapore ahead of the historic summit with North Korea’s leader Kim Jong Un, which will take place on Tuesday. This week, the US data calendar consists of CPI readings on Tuesday and the Federal Open Market Committee rate decision on Wednesday. Money markets imply an 84% probability of a rate hike by the Fed, with the central bank remaining on track to keep markets guessing over a fourth hike this year.

CAD The loonie made minor gains against the greenback last week, with the majority of its gains coming on the Friday. Friday’s gains followed Canadian Prime Minister, Justin Trudeau, and Donald Trump laughing and smiling their way through the G7 meeting, with markets pricing in the likelihood of an exemption for Canada from US tariffs. This looked plausible, with US Treasury Secretary pleading to Trump earlier in the week to exempt Canada from Steel and Aluminium tariffs due to the US having a trade surplus with Canada in those goods. However, the risk of a trade war rose on Saturday after Trump left the summit early, tweeting that Canadian Prime Minister Justin Trudeau was “very dishonest and weak”. The tweet from Trump shattered any hope that Canada could avoid tariffs on steel and aluminium, and once again raised the prospect of further discord between the two historic allies.

UK news

  • Bloomberg: Italian Markets Rally After Finance Minister Commits to Euro Italian bonds and stocks surged, with the euro rallying, after Finance Minister Giovanni Tria made assurances that the country would stay committed to the shared currency.
  • Reuters: Euro rises despite G7 fracas as investors look to ECB, Fed The euro rose on Monday as traders turned their attention away from a divisive G7 summit towards a European Central Bank (ECB) policy meeting that could signal the beginning of the end of the bloc’s vast economic stimulus.
  • Wall Street Journal: Singapore Summit: Pompeo Says U.S. Is Firm on North Korean Denuclearization U.S. Secretary of State Mike Pompeo said Washington’s position on North Korean denuclearization “remains clear and unchanged,” staking out a resolute position a day ahead of a historic summit between President Donald Trump and Kim Jong Un.

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