Morning Report: 31 August 2018

31st August 2018

GBP. Barnier’s comments on Wednesday changed sentiment on sterling more than anything, and this was notable as a GBPUSD was continuously tested and attempted to break lower. The brightening sentiment propped up sterling which ultimately closed above said support but failed to break a new high for the month. The EU’s Chief Negotiator, Michel Barnier, made a potential U-turn yesterday, however, stating that the EU must be prepared for a no-deal Brexit as the possibility of a hard break is still very real. Parliament reconvenes from its summer recess next week meaning Brexit progress and coverage will likely ramp up.

EUR. The risk-off sentiment was clearly felt by the euro yesterday as the single currency lost against many currencies but managed to stay ahead against more risk sensitive currencies like AUD, CAD and NZD. German Consumer Price Index figures for August came in below expectations at 1.9%, while across the pond the US Core Personal Consumption Expenditures did come in on target. Today at 10:00 BST, the Eurozone-wide figure will be released. If this reading is soft as well, then the differences between US and Eurozone inflation only stand to increase, which would add further to the narrative that inflation in the Eurozone remains lacklustre, while US inflation is firm with risks to the upside. As this has the potential to increase the divergence in monetary policy between the European Central Bank and the Federal Reserve, this will be a risk factor for euro in the months to come.

USD. The dollar broadly rallied yesterday as a general risk-off mood played out. This was evident with traditional “safe haven” currencies such as JPY and CHF making gains. The Emerging Market space didn’t fare too well either, compounding the dollar strength. The Federal Reserve’s favoured measure of inflation, Personal Consumption Expenditure, was released yesterday for July and showed Core PCE rose to the Fed’s 2.0% target – job done for Jerome Powell. Today, however, the dollar has started on the back foot following comments from Trump threatening to leave the WTO.

CAD. The loonie weakened yesterday as improving prospects of a favourable NAFTA outcome took a back seat to weaker than expected Gross Domestic Product data. Monthly GDP changed 0.0% in June, short of the 0.1% expected, bringing annualised growth in the second quarter to 2.9%, also less than expected. The release casts further doubts on the likelihood of a rate hike at next week’s Bank of Canada meeting and weighed on the loonie. Today at 13:30 GMT price indices for Raw Materials and Industrial Products will be released.