Morning Report: 11 May 2018

May 11, 2018

GBP. Another poor day for sterling yesterday, with only the Kiwi dollar losing more ground against its G10 currency counterparts. The Bank of England kept interest rates on hold at 0.5%, which was in line with the revised market expectations after a recent run of poor economic data from the UK. The Monetary Policy Committee voted 7-2 against a hike, with Ian McCafferty and Michael Saunders dissenting from the consensus and holding their hawkish stance. BoE Governor Mark Carney’s Q&A stemmed sterling losses momentarily as he reiterated that the BoE is committed to a hiking cycle. However, as the press conference descended into a discussion of the reliability of Carney’s forward guidance to markets over recent months, sterling weakened further. The MPC believes Q1’s GDP figures were a transitory shock and will be revised up from 0.1% to 0.3%, with growth then picking up and ultimately justifying a slow and steady series of hikes. In politics, Prime Minister Theresa May has postponed key Brexit legislation as there is unlikely to be a breakthrough over customs arrangements and the Irish border by next Tuesday’s Brexit Cabinet meeting.

USD. Geopolitical risk was lifted from the greenback yesterday, with Trump announcing he will meet with Kim Jong Un in Singapore on June 12th, although the net change was minor as tensions over the US withdrawal from the Iran nuclear deal rose. The US Consumer Price Index for April showed inflation picking up from March’s -0.1% to 0.2%. Despite this coming in under forecast, it raised YoY inflation to 2.5%. With inflation taking a breather from its acceleration in recent months, appetite for the Treasury’s biggest auction of 30-year bonds remained, and yields fell over the course of the day. At 13:30 BST US Import and Export Price Indices are released.

EUR. Euro had an uneventful session with a large proportion of the Eurozone’s core members enjoying a bank holiday but nevertheless managed to advance versus GBP and USD. The European Central Bank’s Economic Bulletin, its most up to date assessment of the Eurozone economy, was published yesterday and saw more risks to growth from global than from domestic factors. This provides a nice hint of what to pay attention to in order to predict what policy direction the ECB will announce in its coming June meeting. ECB President Mario Draghi will speak at 14:15 BST in Florence, though little is expected on monetary policy.

CAD. The loonie achieved some solid gains against the US dollar for the second day in a row. An improving outlook for when the NAFTA uncertainty will be lifted can be considered as one of the drivers of recent CAD strength. US speaker of the House Paul Ryan said NAFTA talks should come to fruition as soon as on the 15th of May, while Canada’s Foreign Minister Chrystia Freeland struck a positive tone and noted ample progress had been made since Monday. Today at 13:30 BST Unemployment figures and Employment Change will be released, followed by Bank of Canada Governing Council member Wilkins speaking at 14:10.

UK news

  • Financial Times: Deadlocked Theresa May postpones key Brexit votes. Theresa May postponed key Brexit legislation while allies on Thursday played down the prospect of any imminent agreement over future customs policy, deepening the paralysis over Britain’s strategy on leaving the EU.
  • Bloomberg: Stocks Mixed as Rate Pressure Eases; Dollar Steady European stocks fluctuated as Asian peers headed for their biggest weekly jump since February after easing U.S. inflation removed some pressure from the Fed to step up the pace of monetary tightening. The dollar steadied after dropping the most since March on Thursday.
  • Bloomberg: Trump Plays Into Hands of Iran’s Hard-Liners The unravelling of the nuclear deal has left the Islamic Republic at a critical political juncture.

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