Sterling has seen a volatile beginning to today with one sharp downwards move against the dollar and the euro with no immediately apparent cause. Following reports earlier in the week by the Telegraph that the UK Government was close to giving up on ambitions of securing a broad free trade agreement with the EU this year, the Financial Times is reporting this morning that the most recent round of talks has not made progress, and the EU will warn that time is running out. Lead EU negotiator Michel Barnier is expected to comment on the lack of progress at some point today or tomorrow. On the macro data front, the Confederation of British Industry will release their Industrial Order Expectations index today at 11:00 BST, while Monetary Policy Committee member Jonathan Haskel will speak on the economic impact of the pandemic at 12:00.
The euro printed a 4-day rally against the US dollar yesterday and surged to another 18-month high as sentiment towards the dollar continued to worsen. The ongoing euro uptrend initiated from the European Union’s ability to coordinate a compromise on the recovery fund, while the dollar was being pressured by a combination of domestic factors. In the coming days, the EU is planning on easing landmark regulations on securities trading and investment research, as they argue that softening the rules on the finance industry is needed to support the economic recovery. The proposed plan would allow payments to be re-bundled for research on fixed income markets and includes a rollback on investor-protection rules that has been an ongoing issue in the industry. If approved by the European Parliament and all 27 member states, the plan could take effect in early 2021. This morning’s data releases included an upward surprise and notable recovery of the German GfK consumer confidence. While still negative, the index climbed from -9.6 last month to -0.3, compared to the consensus of -4.5, suggesting that Europe’s largest economy is hopeful of an economic recovery. The reduction in value-added tax in Germany is likely to have contributed to the boost in consumer confidence and will in turn help to further boost spending throughout the quarter. With the remainder of the day being light on the data front, markets eye the online seminar by ECB’s Luis de Guindos at 10:00 BST.
Sentiment towards the dollar continues to deteriorate this morning as US-Sino tensions and concerning Covid developments dominate headlines yet again, causing the Bloomberg dollar index to trade near its lowest level since March. The Global Times, China’s Communist Party newspaper, reported that Beijing would likely retaliate against the US government’s order to China to shut its consulate in Houston, as the forced closure is seen as an attempt to blame Beijing for the US failures ahead of the presidential elections. The news comes after the US stated on Wednesday that China has 72 hours to close the consulate “to protect American intellectual property and Americans’ private information”. Although there has been no official report from China on how the nation will retaliate, Reuters reported that China is considering shutting the US consulate in Wuhan. On the domestic level, today may be marked by the introduction of the GOP stimulus plan by Senate Majority Leader Mitch McConnell after the Republicans and the White House finally reached an agreement Wednesday evening on the spending portion of the stimulus plan. Although the agreement itself is a major breakthrough, the final plan may see some obstacles along the way. Some GOP senators have shown resistance about more deficit spending and the significant disagreements between the Democrats and Republicans on the price tag for additional stimulus. Additionally, the final plan will still need the support of the Democrats to pass the House of Representatives. While US-Sino relations, Covid case data and the progression of the stimulus package will be in focus today, the release of last week’s initial jobless claims data will still draw some attention as global markets take their cues from the greenback and US economic data.
The loonie has continued its positive momentum in this morning’s session as broad dollar weakness continues in markets. The Canadian dollar is up over 1.3% this week as things stand, while WTI is trading back up above $42 a barrel, its highest level since early March. Both the loonie and WTI are being priced off of the broad dollar despite data being released over the last 24 hours. Yesterday saw inflation data for June released for Canada with headline CPI rising from -0.4% in May to 0.7%. Although, we still believe this underreports the true level of inflation that the Bank of Canada is monitoring with their “adjusted” measure. Despite this sizable jump in inflation, the fastest monthly rise since March 2011 to be exact, the loonie barely moved. USDCAD continued to take its cue from how the US dollar broadly traded in markets and the same can be said for WTI. Yesterday’s Department of Energy release saw a substantial rise in US inventories, although oil closed near its highest level since the pandemic roiled markets. The 5 million barrel build in inventories may cap oils upside in the near-term as supply concerns persist, along with renewed US-China trade tensions which could dampen demand and risk appetite, but for now a weaker dollar remains the driving force behind a higher oil price. This is because commodities are globally priced in USD so a weaker dollar makes them more attractive for investors. With the wind behind its sails and the dollar continuing to weaken on a more prolonged domestic outbreak, the loonie is travelling towards its highest level since March, sitting just shy of 0.5% from it this morning.