Morning Report: 21 July 2016

21st July 2016 By: Ranko Berich

GBP After reaching a fresh low for the week in the early hours of yesterday morning, sterling rallied after Labour Market data from May showed Unemployment Falling and wages rising. The Unemployment Rate fell to 4.9% from 5%, at or below most measures of full employment for the British economy, while Average Weekly Earnings rose a solid 2.3% year on year. Despite how encouraging the data is, the fact that the figures pertained to May before the Brexit vote leaves a question mark over the labour market. Figures for June or July may reveal an adverse reaction. Sterling did receive a further boost though with Theresa May’s official visit to Germany to meet with Angela Merkel, which yielded an implicit acknowledgement from the German Chancellor that the UK need not activate formal Article 50 proceedings immediately. Despite this, this morning’s Retail Sales data for June showed a 0.9% fall, larger than the already pessimistic 0.6% expected by economists, suggesting that consumers may have begun to delay purchasing decisions due to the EU Referendum.

EUR The euro came under heavy pressure yesterday, but is staging somewhat of a rally this morning against USD, although it remains weak vs GBP relative to recent levels. Today will be an important day for the single currency, as the European Central Bank is expected to outline its latest response to the eurozone’s ongoing deflation issues, as well as Brexit. The ECB’s latest monetary policy decision will be announced at 12:45 BST, followed by a press conference given by President Mario Draghi at 13:30. The likely effect of Brexit on the eurozone’s economy is not the only issue the ECB must grapple with. There is mounting evidence to suggest that the ECB’s bond buying programme is straining at its limits, with recent German public bond auctions failing to achieve the desired level of interest from the public, while the pool of bonds eligible for purchase is shrinking. Any hints during today’s press conference that the ECB may expand the portfolio of assets eligible for purchase may weaken the euro.

USD Having made significant inroads against GBP and EUR throughout the first half of the week, USD’s progress was halted against these two currencies yesterday. No headline US data was released, but the Republican National Convention continued, underlining potential turmoil in the run-up to the US Presidential Election. This afternoon weekly Unemployment Claims will be released at 13:30 BST alongside the Philadelphia Federal Reserve’s Manufacturing Index. Later in the afternoon the House Price Index will be released at 14:00, followed at 15:00 by Existing Home Sales and the CB Leading Index.

CAD USDCAD continued to rise as the loonie and crude oil prices remained well offered yesterday, despite a lack of Canadian fundamental data. US Crude Oil inventories continued to fall, according to weekly data released by the US Energy Information Administration. This provided a temporary and limited reprieve for the loonie and for crude oil prices, which rallied on the news before beginning to weaken again. Today at 13:30 BST Wholesale Sales data will be released.