Morning Report: 6 June 2017

6th June 2017 By: Ranko Berich

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GBP. Sterling advanced yesterday, despite worse-than-expected services survey data in the UK. The latest figures of Markit’s Services PMI shrank again in June, barely two weeks before the Brexit negotiations begin. Sterling rallied in mid-April on the back of the announcement of snap elections, as markets anticipated the Conservative government winning a larger majority, which would give the government greater autonomy in the negotiations with the European Union. Should this scenario be challenged this week, GBP could quickly resume its recent downward trend. There will be no macroeconomic data until after the General Elections, hence sterling is expected to fluctuate as various opinion polls continue to drip through.

EUR. The euro unexpectedly retraced yesterday afternoon despite the lack of economic releases or headlines, and is falling again today against both USD and GBP. Markets are taking profit, and demand of euros is subdued, ahead of this week’s European Central Bank meeting in Estonia, as investors are reluctant to believe the ECB will change the tone with regard to monetary policy. However, such scenario cannot be entirely discarded as several members of the ECB have expressed their view on the necessity to reconsider the actual extent of liquidity addition in the eurozone.

USD. The dollar continues to suffer today as markets keep reassessing economic and interest rate expectations in the US, after last week’s poor labour market data. A general ‘risk-off’ move appears to be building up on the horizon, as the Japanese yen, a common safe haven, has reached a 6-week high against the greenback. Yesterday’s macroeconomic data, again, disappointed across the board, with worse-than-expected ISM non-manufacturing PMI, Markit services PMI, and unit labour costs.

CAD. The loonie benefited yesterday from stable crude oil prices at the same time markets give some trust to the Canadian dollar. Last week’s positive data and a more confident Bank of Canada are the main catalysts for the loonie this week.

UK news

FT: EU negotiators steeled for post-election Brexit crisis. UK negotiating team, Brexit bill and sequencing all key points of contention. EU negotiators are bracing themselves for a “big crisis” over Brexit soon after this week’s UK election, including a possible walkout as early as the summer or autumn. Alarmed by an election campaign that has stoked up tensions between UK and continental European leaders, Brussels is hoping for reassurances over Britain’s negotiating team and answers on whether the UK will reject outright the EU’s divorce-first timetable for talks. The negotiations could dominate the new British government’s time in office. The European Commission is expected to make contacts with London to organise the talks within days of the election on June 8.

Reuters: UK consumer stumbles in May as surveys show spending squeezed. British shoppers kept a tighter grip on their credit cards last month as they felt growing pressure from rising inflation, new figures showed just two days before they vote on whether to keep Prime Minister Theresa May in power. With record numbers of people in work and public borrowing more manageable, the economy has played a smaller role in this election campaign than in 2010 and 2015, though the opposition Labour Party has stressed a growing squeeze on living standards. Official data for the first three months of 2017 showed that retail sales volumes fell by their most since 2010, and Tuesday’s figures from the British Retail Consortium and Barclaycard point to further weakness. The BRC said total retail spending last month showed year-on-year growth of just 0.2 percent, after bumper growth of 6.3 percent in April when shoppers spent more over Easter.