Morning Report: 25 May 2017

25th May 2017 By: Ranko Berich

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GBP. Sterling traded almost flat against USD yesterday, as G10 GX volatility was subdued across the board, with few exceptions. General election campaigning is expected to resume over the course of today and tomorrow, with Theresa May heading to a NATO summit, where she is expected to rebuke US officials for the leaking of sensitive information pertaining to investigation of the Manchester bombing. The UK data calendar will also resume today, with the release of revised Gross Domestic Product growth for the first quarter, alongside indices for Business Investment and Services. Business Investment is expected to pick up after the 0.9% contraction seen at the last reading, with risks tilted strongly to the downside for sterling in the event of a miss.

EUR. The euro had an uneventful day yesterday, recouping Tuesday’s losses against USD after the release of the minutes from the most recent US Federal Reserve meeting. Data was light on the ground, although GfK German Consumer Climate, a prominent measure of consumer confidence in Germany, was released at 10.4, a slight increase for the index compared to last month’s release, underlining the sustained strength of the German economy. Yet again, European Central Bank President Mario Draghi pushed back strongly against any suggestions that the ECB should be looking to tighten policy sooner rather than later in a speech in Madrid. Next month’s Governing Council meeting stands out as a major event for the ECB, as a recent improvement in inflation data is likely to embolden members who believe the time is approaching for QE to end. No eurozone data will be released today, and a number of countries enjoy bank holidays for Ascension day.

USD. USD weakened in the wake of yesterday’s Federal Open Market Committee minutes, despite the Fed signalling fairly clearly that members were happy raising rates in the near future, possibly as early as June. The key judgement in the Fed’s recent meeting was that the current slowdown in growth in the US economy would prove transitory, and there was little evidence of serious dissent to this view. Members were similarly willing to look through the current slowdown in inflation, although further increases in rates beyond the immediate future is likely contingent upon an improvement in these figures. The minutes also acknowledged the sword of Damocles hanging over global markets – that a “highly simulative” fiscal policy under current economic circumstances would mean the Fed’s current gentle path of hikes would need to be reassessed. Today at 13:30 BST weekly Unemployment Claims will be released alongside Goods Trade Balance and Wholesale Inventories.

CAD. The loonie strengthened yesterday after the Bank of Canada’s latest rate statement was interpreted my many observers and market participants as a “hawkish hold”. Rates remained unchanged, but the statement accompanying the decision was markedly more optimistic on the prospects of the Canadian economy, saying that adjustment to lower oil prices was “largely complete” and labour market data was “robust”. Today’s OPEC meeting in Vienna could provide another boost for the loonie, if the oil producer’s cartel manages to agree on extending its current supply restrictions with the aim of supporting crude oil prices.

UK news

FT: Fed close to pulling the trigger on June rate rise. Central bank prepares to pare back balance sheet. The Federal Reserve signalled that it is close to pulling the trigger on another rise in short-term interest rates and is preparing to begin paring back its multi-trillion dollar asset holdings this year as the US economy recovers. Most Fed policymakers said at the May 2-3 rate-setting meeting that a further increase in short-term interest rates will be needed “soon” if the economy stays on track, in a sign it is preparing to tighten policy again as early as the June meeting.

Reuters: UK inflation expectations edge up, little pressure on BoE. The British public’s expectations for inflation over the next 12 months rose slightly this month but remained within the tight range of the past six months, a survey for Citi by polling company YouGov showed on Wednesday. “Stable short-term expectations show that the current spike in inflation is not self-reinforcing,” Citi economists wrote in a note to clients. “There is no urgency to hike rates, in our view, and we expect the majority (of Bank of England policymakers) to avoid premature monetary tightening, given the economic risks.” Citi said year-ahead inflation expectations increased to 2.6 percent from April’s reading of 2.5 percent, lagging behind a sharper increase in the official measure of headline consumer price inflation which hit a three-year high of 2.7 percent.