Morning Report: 03 August 2018

3rd August 2018

GBP. Super Thursday didn’t prove “super” for sterling, which eventually depreciated by 0.84% against the dollar. Despite hiking interest rates 25 basis points to 0.75%, dovish undertones by Bank of England Governor Mark Carney in the press conference caused sterling to fall. Carney stated that the marginal tightening by the BoE was only to keep monetary policy as accommodative as previously. In Carney’s own words; the BoE “must walk, but not run, in order to stay still”. This signalled to the market that yesterday’s move was not the start of a hiking cycle, and thus a further hike was unlikely in the near future. On the flip side, however, bullish sterling investors may find some relief in the inflation report released yesterday, which suggests that headline inflation won’t moderate to the BoE’s 2% target for another 3 years – suggesting that further tightening may indeed be required. Furthermore, the report revealed that the BoE estimate that long-run interest rates will eventually rise to within a band of 2 to 3%. Today at 09:30, the Services Purchasing Managers Index will be released. A slight moderation in the growth of the service industry is expected, with July’s reading forecasted to fall from 55.1 to 54.7.

EUR. The euro suffered losses against USD for the third day in a row yesterday, though it did hold its ground against GBP, indicating that the lower EURUSD is mostly driven by a stronger US dollar. Yesterday’s Producer Price Index for July came in slightly above target at 0.4%, heading for a year on year growth rate of 3.6 %, an upward trend started at the beginning of 2016 that appears to continue. The Final Reading of July’s Services sector Purchasing Manager Indices is published for individual countries throughout the morning, resulting in a Eurozone-wide reading at 9:00 BST.

USD. Only the Japanese yen was able to keep up with the greenback yesterday as the after effects of the Wednesday evening Federal Open Market Committee communications and renewed trade tensions pushed the US dollar higher. US Secretary of Commerce Wilbur Ross said the goal of the US trade policies should be “to create a situation in which it’s more painful for China to continue their bad practices than to reform” to which China responded it will never respond to US threats. On the back of safe-haven flows flowing into the dollar, the DXY dollar index is now set for its second week of gains in a row after the strong growth data last week and the slightly higher chances of two rate hikes this year. This afternoon, US labour market data is released at 13:30 BST, with the increase in employment signalled by the Nonfarm Payrolls, report expected at 190,000 new jobs.

CAD. The loonie continued to rally yesterday and is now the best performing currency of the G10 currency board this week, despite yesterday being a quiet day data-wise. Today may be more lively for the loonie, with trade being a hot topic, the Trade Balance for June is scheduled for release at 13:30 BST.

FX Elsewhere. CNY traded downwards for the eighth week in a row after the US and China exchanged fresh trade barbs. A strategic devaluation of CNY seems unlikely at this moment in time, as the Chinese desire a stable currency to prevent capital outflows from the country. Nevertheless, rhetoric from the US indicates the White House is willing to continue these trade escalations to the bitter end, which led to such a large market sell-off Japan’s stock market now surpassed the Chinese stock market as the second in the world by market capitalisation. These developments imply the woes for the Chinese economy and the yuan may be far from over.