Morning Report: 24 July 2018

24th July 2018

GBP.  In a fairly uneventful day, sterling lost out as dollar strength kicked off once again. Brexit headlines were knocked back and forth regarding preparations for a no deal scenario as Prime Minister Theresa May travelled to Newcastle to promote the ‘Northern Powerhouse’ scheme. The proposal aims to bring growth back to the historic manufacturing sectors of the north, which was high on May’s agenda when entering Downing Street but has been overshadowed by the ongoing Brexit issues. Headlines yesterday suggested that the much anticipated and altered ‘white paper’ will be released sometime today, whilst new Brexit Secretary Dominic Raab faces questioning over his new position in front of the Commons Select Committees. The day will be ended by parliament breaking up for a six week summer recess. Theresa May is assumed to be using this break to advertise and sell her Brexit white paper up and down the country. With little data released this week, the Bank of England’s August rate hike to 0.75% is all but certain according to money markets. Overnight Index Swaps currently price in a rate hike on 2nd August at 87.9%. At this meeting, the Bank of England is also expected to release the UK’s “Goldilocks rate”. This rate is the level at which interest rates must reach to neither stimulate nor dampen economic growth and inflation. The Bank of England does not give explicit forward guidance unlike the Federal Reserve, so the release of such a rate will give investors a clearer vision of the path in which the central bank will embark upon after years of accommodative monetary policy. However, this rate is subject to alterations due to the dynamic nature of the economy.

EUR. On a hot and slow, summer’s Monday, the euro seemed to melt a little and lost out against most G10 currencies with no major data releases coming that were able to prop up the currency. Flash Consumer Confidence for July came out in the afternoon exactly in line with forecasts at -1, indicating no change in consumer sentiment compared to last month. Today, the week kicks off in earnest data-wise, with French and German Flash Purchasing Manager Indices for the Manufacturing and Services sectors coming out at 8:00 and 8:30 BST respectively, culminating in a Eurozone-wide print at 9:00 BST.

USD. Rising yields on US treasuries gave a boost to the greenback yesterday and USD performed strongly against the rest of the G10 currencies, though the reason for this steepening in US yields remains clouded in uncertainty. Rising inflation expectations in the US may have played a role, with tariffs installed that are likely going to prove inflationary, combined with an economy that likely grew at its fastest pace since 2014 in Q2 2018. These drivers describe the environment for this move, yet a clear catalyst remains hard to identify. Today at 14:00 BST the House Price Index will be released, followed by Flash Services and Manufacturing sector PMIs at 14:45. Today at 18:00 BST, USD$35bn worth of 2-year bonds are auctioned off, which will likely see the 2-10 yield curve flatten again after spiking yesterday. The auction may not see demand as high for 2-year treasuries as previously experienced due to speculation that the Federal Reserve will hike interest rates more aggressively than the forward guidance dot plot suggests – a view that will be reinforced should Friday’s release of Gross Domestic Product for Q1 prove to be as hot as analyst expect.

CAD. Yesterday the loonie posted minor losses against the greenback in a day which saw the dollar broadly rally and oil prices moderate. Donald Trump’s tweet late Sunday evening threatening Iran with sanctions the “THE LIKES OF WHICH FEW THROUGHOUT HISTORY HAVE EVER SUFFERED BEFORE” cast doubt over the future supply of oil – a dominating theme thus far in 2018. Iran, OPEC’s third-biggest oil producer, already faces sanctions by the US in November, but the threat of sanctions being imposed stimulated oil prices early in yesterday’s session. But as the dust settled, the tweet was cast to the back of the oil markets mind and the loonie began to post faster losses against a rallying US dollar, eventually ending up 0.2% down on the day.