Morning Report: 4 July 2018

4th July 2018

GBP.  Parallels between the England game and sterling’s trading day are easily drawn as the currency traded mostly sideways during the day, but eventually came out on top, with advances especially pronounced against USD. GBPUSD rallied as Monday’s risk off dollar move seemingly unwound, with GBPEUR making ground back into the range it only dipped below once in 3-months. There looks to have been no trigger as sterling begun the rally in the early hours of the session, but Michael Saunders – a known hawkish member of the Bank of England’s Monetary Policy Committee – spurred it on with comments that slack in the labour market has disappeared and that the BoE will have to hike faster than expected. The market’s implied probability of a rate hike in August currently sits at 65.5%. Yesterday’s release of a stronger than expected Construction Purchasing Managers Index for June added to the sterling strength, which saw the sector hit hardest by Q1’s weather shocks rebound with the highest growth of the sector since November. Today at 09:30 BST, Services PMI will be released with no increased rate of growth expected for June.

EUR.   Positive data and hawkish comments by European Central Bank’s Chief Economist Peter Praet could provide little solace for the single currency yesterday as it softened against most currencies, with a minor plus against USD. The Producer Price Index in May delivered double the price growth that was expected at 0.8%, overshadowing a minor miss in Retail Sales with a flat 0.0% growth in the same time period. Praet was getting ahead of where the ECB’s monetary policy stands at the moment and discussed how interest rates will become an important policy instrument now the bond purchases are being wound down. Throughout the morning several Eurozone countries release their final Service Sector PMIs, culminating into a Eurozone broad print at 9:00 BST.

USD. After being on an almost unbroken rally since mid-April the greenback took a breather yesterday and softened as Monday’s risk move unwound. The downward pressure continues to test the dollars resolve this morning, with sterling, euro and JPY up against the greenback. Initial trade tensions had the US dollar gain as a safe haven destination, now doubts steadily arise about how the protectionist measures might slow down the US economy as former allies retaliate with trade tariffs of their own. So far the Manufacturing sector seems to shrug this off, with Factory Orders in May stronger than expected at 0.4%, while the April reading was also adjusted upwards. The only fireworks today will come from the fourth of July independence day celebrations and US bank holiday, which means markets will remain closed in the US and trading volumes are likely to be lower.

CAD. USDCAD continued its current downtrend yesterday as the loonie rallied by a third of a percentage point. As uncertainty over future oil supply crept into the market in the morning, oil prices rose by over a percentage point and a half, but later pared the price increase after news that the Saudi government granted the US’s request to pump more oil. This set the loonie off in its tracks, but unlike WTI prices, the surge failed to subside. June’s Manufacturing PMI came in at 57.1 compared to expectations of 56.2, evidencing that the manufacturing sector in the Canadian economy is growing faster than expected.