Morning Report: 17 July 2017

17th July 2017 By: Ranko Berich

GBP Sterling made significant inroads against the US dollar on Friday, soaring to a fresh high for the year amid unexpectedly poor US data. Brexit talks resume in Brussels today, with Philip Hammond calling for a transitional arrangement to soften whatever blow is coming to externally focussed businesses. Further sterling relevant headlines seem likely this week, especially given that the Government has been making conciliatory noises on the issue of a divorce payment to the European Union. This week’s major release will be Consumer Price data tomorrow, which could well see the headline CPI rise above 3%. Later in the week, Retail Sales will be released on Thursday.

EUR The euro did also surge against USD on Friday, but stopped short of the highs seen earlier in the month, further suggesting that the single currency’s long rally is finally beginning to find some resistance. This week’s European Central Bank rate announcement and press conference on Thursday represent a pivotal event for the euro; much of its strength over the past 6 months has been built on rising expectations of an eventual end to quantitative easing from the ECB. If Thursday’s presser reveals that the Governing Council has finally begun to even discuss the prospect of monetary normalisation, the euro will quickly be eyeing post-QE highs against USD and several other currencies. Today at 10:00 BST the latest Consumer Price Index data will be released.

USD Friday’s poor data acted as something of a coup de grace for the US dollar, which plummeted to fresh lows for the year against many currencies including GBP and AUD, as well as on a weighted basis. Retail Sales and the Consumer Price Index were both released well short of expectations, with headline CPI flat on the month and retail sales falling 0.2%. Neither of the releases suggest the US economy is overheating even remotely, and, if continued in next month’s data, may even prompt a rethink of the necessity of further rate hikes this year. This will be a quiet week for the US dollar, with no data releases as important as last week’s. The Empire State Manufacturing Index will be released today at 13:30 BST, followed by Building Permits and Housing Starts on Wednesday.

CAD After appreciating sharply last Wednesday off the back of a rate hike from the Bank of Canada, the loonie saw further gains on Friday amid a broad USD sell off. Retail Sales and Consumer Price Index data on Friday will be the week’s main events for loonie, with further strong growth expected in the Core CPI in particular. Today at 13:30 BST Foreign Securities Purchases data will be released.

UK news

  • FT: Business ‘confused and dismayed’ at government over Brexit. Warming relations reveal gaps in planning and confusion over myriad working groups. An attempt to woo British business leaders by the government has left them confused over who to speak to and dismayed at the lack of preparation as Brexit negotiations restart on Monday. An initially frosty relationship between the government and businesses has warmed since the June election, with Theresa May’s administration now keen to receive input from businesses over Brexit. More than 30 executives and lobbyists met David Davis, Brexit secretary, and other ministers at the official government residence at Chevening in Kent this month, while the Federation of Small Businesses hosted Margot James, their relevant minister, and Robin Walker, a Brexit minister, in London last week.
  • Reuters: UK budget watchdog warns of long-term Brexit risk for public finances. Britain will need to curb public spending further or raise taxes if leaving the European Union does long-term damage to economic growth, underscoring the importance of the country striking new trade deals, the government’s budget watchdog said on Thursday. The Office for Budget Responsibility said ensuring robust trade agreements was more significant for the long-run health of Britain’s public finances than the size of any “divorce bill” to settle one-off liabilities with the EU. “While some numbers mooted for it are very large, a one-off hit of this sort would not pose a big threat to fiscal sustainability. More important are the implications of whatever agreements are reached with the EU … for the long-term growth of the UK economy,” the OBR said. Just a 0.1 percentage-point fall in the annual growth rate of the economy and tax revenues would cause Britain’s debt-to-GDP ratio to be 50 percentage points higher after 50 years, if public spending plans remained unchanged, the public body added.