Morning Report: 10 July 2018

10th July 2018

GBP.  Volatility was the theme in the UK yesterday, with both the political climate and sterling experiencing big swings. In the late hours on Sunday, Brexit Secretary David Davis resigned from his position in Cabinet over Theresa May’s proposal for a ‘soft Brexit’ deal with the EU from the cabinet’s Chequers meeting. Markets awoke on Monday with sterling making gains from the off as participants preferred the business-friendly scenario over the tail risk of a vote of no-confidence occurring. The like for like replacement for Davis with Dominic Raab, a fellow Brexit hardliner, assured markets that a sterling rally was the correct decision. That was until Foreign Secretary Boris Johnson resigned in the early afternoon, causing sterling to fall over a percentage point as the likelihood of an attack on May’s leadership increased. Ultimately, sterling posted a 0.17% loss on the day against the dollar. The long-serving health secretary, Jeremy Hunt, replaces Johnson as foreign secretary but this announcement has only managed to steady the ship. Today, the Office of National Statistics releases its first rolling 3-month estimate of GDP which will show economic growth of the UK in the 3-months up to May alongside a monthly estimate for May itself, with GDP expected to grow 0.3% MoM. Data releases may not have such a significant impact as political risk weights on market sentiment, but negative releases may exacerbate an already gloomy outlook.

EUR.   The euro posted minor gains against the dollar yesterday despite a plethora of European Central Bankers taking to the wires. Governing council member Ewald Nowotny stated that it is not unlikely the ECB will discuss the end of its QE programme in their July 26th meeting, whilst Benoit Coure played down the risk to a trade war saying that as things stand, the path of recovery for the Eurozone’s economy will not be derailed. Then ECB governor Mario Draghi took to the wires in Brussels at the Hearing of the Committee on Economic and Monetary Affairs at 2pm. Draghi reiterated the ECB’s forecast for inflation to be 1.7% for the next 3 years and stated that the ECB’s confidence in the inflation path is growing. This nudged the euro up to a three week high against the dollar. Yesterday also saw Germany’s trade balance post a negative surprise coming in below forecast and previously at 19.7bn for May, whilst the Eurozone Sentix Investor Confidence index showed increased confidence of investors as the index rose from 9.3 to 12.1 in July.

USD. The composite dollar DXY index had its worst 5-day run in 5 months ending yesterday, despite little data being announced. Yesterday’s main development in the US was Donald Trump’s nomination of Brett Kavanaugh to the Supreme Court to replace the recently retired swing voter Justice Anthony Kennedy. This could secure a conservative majority in the Supreme Court for the coming years if he is confirmed by Senate. Emerging markets also made gains against the dollar as the risk towards further trade protectionism remains. Today at 11:00 BST NFIB release Small Business Optimism, a good leading indicator for economic growth, with a moderation from 107.8 to 106.9 expected.

CAD.  The loonie was one of the few non-risk averse G10 currencies to post losses against the dollar yesterday, with the other being sterling. Oil prices have stabilised while no new information over future production levels has been shed, whilst participants seem to be in standby mode ahead of the Bank of Canada rate decision on Wednesday. Currently, the market prices in an 87.7% probability of a rate hike by the BoC. Later today, Housing Starts data is released at 13:15 BST, with a rise from 195.6k to 210.0k expected in June.