Morning Report: 15 August 2018

15th August 2018

GBP. Yesterday’s labour market data did little to further sterling’s morning rally despite the headline unemployment rate falling to its lowest level since 1975. The reasoning behind this is because the 4.0% unemployment figure did not filter through into growth in Average Weekly Earnings, which moderated from 2.5% to 2.4% in June. With the Bank of England looking at domestic wage pressures on inflation, the slump in wage growth will not prompt investors to bring forward their expectations of a further rate hike – currently, the market implies only a 25% chance of a hike in February. Ultimately, sterling ended yesterday’s session in the red against most other major counterparts. However, sterling did post further gains against the euro, and sits comfortably back in the trading range it has only broken once for 2 days since December 2017. Today, both the consumer and producer measures of inflation are released for the UK, with CPI expected to rise from 2.4% to 2.5% in July.

EUR. The euro slid again yesterday, and this morning remains on the defensive as it tests July 2017’s support level. Positive surprises in German investor sentiment for August and Eurozone Gross Domestic Product figures for Q2 stemmed the single currency’s decline in the morning, but the fresh period of dollar strength in the afternoon session saw the euro suffer significantly. Macroeconomic data has taken a back seat in driving the euro’s price action as investors are still weary of European Banks unhedged exposure to the volatile Turkish lira. With no data released for the Eurozone today, EURUSD is likely to continue to test support and be dependent on broad moves in emerging markets and the dollar.

USD. The dollar continues to benefit from both risk off and risk on environments alike. As the Turkish lira began to post further gains against the dollar, emerging markets and the dollar posted gains. Only the loonie made ground against the greenback out of the G10. Late on in yesterday’s European session, a rally in US equity markets simultaneously occurred as USDJPY began to rally. With USDJPY a litmus test for market sentiment towards risky climates, depreciation in the yen signalled along with gains in US equities signalled a risk-on environment and gave the dollar another bout of strength. US retail sales are released today at 13:30 BST. A fall from 0.4% to 0.3% in July’s reading is expected, but with emerging market volatility macroeconomic data has taken a back seat so far this week.

CAD. The loonie continues to benefit from favourable economic conditions, that increasingly build the likelihood of a third rate hike by the Bank of Canada this year. Currently, money markets imply an 81.8% probability of a rate hike by the BoC this year, and with NAFTA uncertainty clearing as the new Mexican administration negotiates with the White House, the loonie is performing well against the dollar. The BoC following the Federal Reserve with interest rate adjustments has benefited the loonie thus far, as the dollar continues to rally off the back of widening interest rate differentials this year.