Morning Report: 17 May 2017

17th May 2017 By: Ranko Berich

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GBP. Sterling sold off in the wake of yesterday’s Consumer Price Index data, and has remained on a downwards trajectory against the euro, but did manage to rally against the dollar. Both the Consumer Price Index and the Core CPI, which excludes volatile items such as fuel, exceeded expectations yesterday, with inflation reaching 2.7% year on year. Higher than expected inflation prints tend to see their currencies strengthen in most G10 economies at the moment, due to expectations of a monetary response. However, the BoE has made it clear that it intends to look through the current overshoot in inflation, and so markets sold sterling as yesterday’s figures showed the extent of the price shock hitting the UK economy. In light of yesterday’s figures today’s labour market data seems crucial for sterling – a slowdown in the jobs market, or in wage growth, would seem to be a major risk for the pound. Labour Market data including the Unemployment Rate and Average Earnings will be out at 09:30 BST.

EUR. The euro remains on a tear this morning, having reached a fresh six month high against the US dollar. Yesterday’s data included the latest Gross Domestic Product figures for the eurozone, which showed growth at 0.5% in the first quarter, as expected, and the widely followed German ZEW Economic Sentiment survey, which showed a continued increase in optimism. The eurozone wide survey was even more optimistic than its German equivalent. Today at 10:00 BST eurozone Consumer Price Index data will be released.

USD. The dollar saw a day of unrelenting losses yesterday, even against sterling which had some bad data releases to contend with. Political risk remained a major theme f or the news cycle, as reports emerged that Donald Trump had asked FBI Director James Comey to drop an investigation into former National Security Advisor Michael Flynn. The request, if the report is true, could be construed as an attempt to obstruct justice – an impeachable offense. Building Permits and Housing Starts both contracted in April, but Industrial Production expanded 1%, the fastest monthly rate in 3 years. Today will be a slow day for the US calendar, with only Crude Oil inventories out at 15:30 BST.

CAD. Although the loonie did rally over the course of yesterday, a small pull back was seen overnight. The crude oil rally stalled yesterday after private sector data from the American Petroleum Institute showed an increase in stockpiles, suggesting that future OPEC action may need to be significant in order to overwhelm the supply increase seen in the North American market. In addition to North American crude inventory data 15:30 BST, Canadian Manufacturing Sales will be released at 13:30.

UK news

FT: Comey memo says Trump asked FBI chief to drop Flynn probe. Document reveals president wanted bureau director to ‘let this go’. Donald Trump in February asked James Comey, then head of the FBI, to halt an investigation into Michael Flynn, the former national security adviser, according to a memo that the law enforcement official wrote at the time. During a private Oval Office meeting with Mr Comey, Mr Trump said: “I hope you can let this go,” in a reference to the FBI investigation into Mr Flynn, according to the memo.

Reuters: Inflation tightens screw on UK consumers as election nears. British inflation hit its highest level since September 2013 last month, extending its sharp rise since the vote to leave the European Union and tightening the squeeze on living costs as a national election approaches. Consumer prices rose by an annual 2.7 percent, data showed, and they look set to rise further due to the fall in the value of the pound and the recent rise in global oil prices. Britain’s economy was barely ruffled last year by the shock vote to leave the EU. But the steady rise in inflation since then, combined with weak wage growth, has slowed its momentum this year.