Morning Report: 27 July 2018

27th July 2018

GBP. Sterling took a hit yesterday, as markets focussed on Brexit news in the absence of data. EU Chief Negotiator, Michel Barnier, rejected the idea of a non-EU member collecting tariffs on behalf of the EU – a key part of Theresa May’s free trade agreement for goods outlined in the divorce bill. With 12 weeks to go before October’s EU summit target for a withdrawal agreement, yesterday’s pushback highlights the increasing time pressure facing May as she takes charge of negotiations personally. Sterling weakened following Barnier’s comments, which set the tone for the rest of the day. In the opening hours of today, sterling is little moved.

EUR. European Central Bank President Mario Draghi spoke yesterday, and the euro once again took this as a signal to weaken, despite Draghi largely reaffirming existing policy messaging. Two big topics were on the mind of ECB watchers before the rate statement and press conference; rate guidance and how the balance sheet of the ECB will be reinvested as the Asset Purchasing Program nears its end. Draghi quickly turned the press conference into a banquet with empty plates as he stated that both topics were not discussed by the Governing Council, nor was it even discussed when this would be discussed. Markets took this as a signal that the dovish rate guidance is even more set in stone than was previously considered. If Draghi’s tone yesterday is any guide, only a near-miraculous turnaround in macroeconomic data over the coming months will stand any chance of changing this position of the GC. Spanish Unemployment meanwhile dipped to the lowest point in almost a decade, beating expectations at 15.3% in Q1 2018. This morning then saw a soft reading of French Q2 Flash Gross Domestic Product at +0.2%.

USD. The greenback topped the G10 currency board yesterday despite all data that came out falling short of expectations. Durable Goods Orders grew a 1.0% in June, below the expected 3.0% growth. The Goods Trade Balance and weekly Unemployment Claims also saw misses compared to their forecasts with the actual reading of -68.3B and 217K respectively, although these misses were very marginal. The big data release of today, or of this week even, is the First Reading of US Q2 GDP growth which analysts envision coming in at a hefty 4.2%. Trump wouldn’t be Trump if he hadn’t found a way to be very present in the headlines around this release by tweeting about the figure that “if it has a 4 in front of it (…) we’re OK”. Just like with the May Non-Farm Payrolls this raises suspicions whether Trump has seen the numbers already in advance and if he is dropping hints on how the print will be. The figure is due at 13:30 BST.

CAD. In a week in which the loonie has made gains against the greenback so far, 0.54% to be exact, yesterday’s move saw a moderation in the loonies progress. This was despite reasonably positive comments on NAFTA from US Trade Representative Robert Lighthizer, who said that negotiations were close to reaching a deal. WTI Crude’s stabilisation below $70 a barrel hasn’t helped CAD, and with little data released, the loonie will likely lose out further to the US dollar in a day that is set to show some staggering economic data come out of the US.