Morning Report: 13 June 2017

13th June 2017 By: Ranko Berich

GBP Sterling took a significant step lower yesterday, as the political uncertainty in the UK continues to rumble on. Despite this, embattled Conservative leader Theresa May did receive a significant boost, as it became clear that she still retains the confidence of the Conservative Party. During a meeting of the party’s “1922 Committee”- an influential collection of backbench MP’s- a contrite May was reportedly given three independent standing ovations. As a result, May can be considered to have the green light to try and finalise the details of a minority Government, and in order to do so she is set to meet the leader of the Democratic Unionist Party, Arlene Foster, today. Long term, this current uncertainty may ultimately have a positive effect on the pound: the prospect of the markets much-feared “hard Brexit” is increasingly seeming a thing of the past, and the Tories are now expected to drop the “no deal is better than a bad deal” mantra, in a bid to appease her prospective DUP bedfellows. This week’s busy and high impact sterling data calendar begins today, with the release of monthly Consumer Price Index data. The Bank of England has been quite sanguine in the fact of the current inflationary surge hitting the economy, but has also been clear that there are limits to its patience. Every inflation release is therefore crucial; if year on year inflation begins to threaten the BoE’s forecast peak at around 3%, the prospect of intervention will begin to loom. Inflation data will be released at 09:30 BST.

EUR EURUSD saw a brief burst of strength yesterday afternoon that quickly dissipated, and is currently trading below yesterday’s open. Yesterday’s data included a sharp contraction in Italian Industrial Production, which fell 0.4% in April, erasing March’s gains. This morning the German Wholesale Price Index was reported to have contracted 0.7%, and at 10:00 BST the widely followed ZEW Economic Sentiment survey will be released. The survey’s large sample size of institutional investors and analysts mean it is a good measure of investor confidence, especially the Germany sub index. The European Central Bank’s chief hawk, Jens Weidman, will speak at 09:10.

USD There were few fireworks in USD trading yesterday, with losses versus CAD balancing gains versus sterling. The data calendar was quiet and the news cycle unusually devoid of controversy. Today at 11:00 BST the NFIB Small Business Index will be released, followed at 13:30 by the Producer Price Index. Attorney General Jeff Sessions will testify today to the Senate intelligence committee regarding ongoing investigations into Russian interference in the US election, beginning at 7:30 BST.

CAD The loonie strengthened sharply yesterday after the Bank of Canada’s Carolyn Wilkins said there were reasons to be encouraged by recent economic developments, and that as this trend continued the BoE would assess if the current levels of easing remained necessary. The BoC under Wilkins and Poloz has been willing to act aggressively in implementing easing to get ahead of a coming deflationary shock, but if this willingness to act quickly is symmetrical remains to be seen, and a rate hike still seems unlikely in the immediate future.

UK news

  • FT: Theresa May apologises to colleagues for election disaster Theresa May has apologised to Conservative MPs for her disastrous general election campaign that left her without a Commons majority and facing new Tory divisions on Europe, declaring: “I got us into this mess and I’m going to get us out of it.” Mrs May was said to have been “contrite” as she faced Tory colleagues for the first time since the election but she promised to fight on to deliver Brexit. “It’s my fault and I take responsibility,” she told a closed-door meeting on Monday evening, according to people who were in attendance. “I’ll stay as long as you want me to.”
  • Reuters: Likelihood of hard Brexit recedes after UK election The chances of Britain ending up outside the single market when Brexit talks are concluded have receded somewhat after last week’s election, although the pound might weaken further against other currencies, a Reuters poll of economists found. Ahead of the election, Prime Minister Theresa May had been expected to win a landslide victory – an outcome Reuters polls had predicted would be best for both sterling and Brexit talks – but as voting day approached those opinion polls narrowed. In the end, May’s Tory party failed to win a majority in parliament, prompting calls for her plan to leave the EU’s single market to be watered down and leading some rival lawmakers to demand the Brexit process be delayed. Droves of newly registered young voters – many of whom voted to stay in the EU – backed the opposition Labour Party, scuppering May’s hopes of a walkover win.