Morning Report: 13 June 2018

June 13, 2018

GBP. Sterling closed flat against the US dollar yesterday, with two short bursts of strength in the morning and afternoon ultimately proving transitory. Theresa May won yesterday’s much anticipated House of Commons vote on amendments to Brexit legislation after the PM made guarantees personally to rebel lawmakers within the Conservative party that their concerns would be addressed. April’s Labour Market data was broadly as expected, with Average Weekly Earnings ex-bonus slowing to 2.8% year on year, while Unemployment was steady at 4.2%, a historic low. All in all the release shows that the labour market has not been dented by the recent growth slowdown in the UK, and will support the BoE’s assessment that slack in the economy is diminishing. Today at 09:30 GMT the latest Price Index data will be released by the Office for National Statistics.

EUR. The single currency had an attempt of a rally around midday yesterday, but eventually gravity brought it back to earth, resulting in a lower close against GBP and USD. German ZEW investor sentiment plunged and fell below expectations to -16.1, with the assessment of the current situation and the future outlook both deteriorating. With Italian politics and global trade tensions weighing on both indices, the results show a significant downturn in business’ outlooks on the economy. Taken at face value these data suggest Germany and the Eurozone are heading for a contraction, although it should be noted these data have the tendency to overreact. Today’s data calendar sees quarterly Employment Change and monthly Industrial Production at 10:00 BST, while markets await the European Central Bank events of tomorrow.

USD. The greenback ranked high on yesterday’s currency board and only had to accept the Swedish krone ranking higher on the G10 podium. US consumer prices rose at the fastest pace in more than six years with the headline Consumer Price Index strengthening 2.8% annualized in May, while the core reading displayed an equally solid growth at 2.2%. Tonight at 19:00 BST the Federal Open Market Committee will publish a decision on monetary policy, with the markets expecting nothing less than a 0.25% hike in their main interest rate. The key focus, however, will be on any mention of a fourth rate hike in their forward guidance. But whether the FOMC sees Trump’s recent trade policies as posing more inflationary or contractionary risks for the economy will attract further attention in this regard, while a reassessment of the estimate of the natural rate of unemployment is closely watched as well. The press conference at 19.30 should shed more light on these issues.

CAD. The loonie sat in the middle of the G10 currency board yesterday, with most currencies depreciating against the greenback after a day of broad USD gains. Unsettled trade negotiations with the US, where 70% of Canada’s exports go to, has continued to weigh on the loonie. There was little made in the way of progress in trade talks between the US and Canada at the G7 summit as the US diverted its attention towards the Singapore Summit between the US President and North Korea’s leader. On the plus side, aggressive rhetoric between the US and Canada has died down, most notably with Trump’s trade advisor Peter Navarro apologising to Canadian Prime Minister, Justin Trudeau, for saying there is a “special place in hell” reserved for him. However, this signalling of calming in trade tensions has had no currency implications for the loonie.

UK news

  • Financial Times: UK PM Theresa May makes Brexit concession to avoid vote defeat Pro-European Conservative rebels forced Theresa May into a dramatic concession in the House of Commons on Tuesday that all but ruled out Britain crashing out of the EU without an exit deal.
  • Reuters: Trump, Kim Begin New Phase of Diplomacy President Donald Trump launched a high-stakes diplomatic effort to rid North Korea of its nuclear weapons, betting that a friendlier approach with North Korea’s Kim Jong Un —including a surprise promise to halt military exercises with South Korea—would work better than intimidation.
  • Bloomberg: Merkel Calls Out Trump, Citing Services Surplus With Europe Chancellor Angela Merkel said the U.S. runs a trade surplus with Europe when services are included, marshalling a rebuff to President Donald Trump’s sustained criticism of German manufacturing exports.

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