Morning Report: 19 July 2017

19th July 2017 By: Ranko Berich

GBP Sterling weakened significantly yesterday after inflation data for June fell well short of expectations, taking the pressure off the Bank of England to hike interest rates in the near future. Year on Year Consumer Price Index inflation eased to 2.6%, down from 2.9% previously, and in line with the Bank of England’s last Inflation Report, which forecast inflation to peak at around 3%. This is a view that remains intact after yesterday’s data, although a marginal overshoot this year still remains possible. The figures strengthen the argument for those within then Monetary Policy Committee who argued that the Bank should be “looking through” the current inflationary shock. No headline sterling data will be released today, meaning attention will remain firmly focussed on tomorrow’s crucial Retail Sales release.

EUR The euro is selling off slightly this morning, having reached highs against a number of currencies including a 14 month high against USD yesterday. Anticipation is building for tomorrow’s European Central Bank meeting, when President Mario Draghi will once again be pressed hard by media on whether the ECB has begun to contemplate tapering asset purchases. Rumours are already swirling, with Bloomberg citing unnamed sources who are reportedly “examining scenarios for the future path of quantitative easing”. Yesterday’s data releases included the ZEW Economic Sentiment survey, which showed marginally lower confidence among the surveyed investors in both Germany and the eurozone as a whole.

USD After selling off heavily yesterday morning, the dollar is beginning to show tentative signs of a rally, or at least stability, and is off lows against a number of currencies including the euro and sterling. In remarks made yesterday, President Donald Trump advocated a novel policy making strategy for the US state-administered and partially funded healthcare system known as Obamacare: doing nothing and allowing it to fail. The development further demonstrates the lack of a headline legislative achievement for Trump and the Republicans, some six months into his presidency. Today at 13:30 BST Building Permits will be released alongside Housing Starts.

CAD USDCAD is trading roughly unchanged compared to 24 hours ago, after a major downwards swing triggered by USD weakness yesterday, followed by a rally. There was a lack of headline Canadian data, which will end today with the release of Manufacturing Sales at 13:30 BST.

UK news

  • FT: ‘Cold feet’: Euro dips from 14-month high ahead of ECB meeting. Euro slips from 14-month high as attention turns to ECB. The euro has slipped back from its highest level since May 2016 this morning as investors eye the European Central Bank’s last major policy decision before the summer lull tomorrow. Anticipation ahead of the governing council meeting has been building after ECB president Mario Draghi rattled bonds and drove the euro higher with bullish remarks on the state of the eurozone recovery at the end of June. Although the ECB’s communications since the Sintra speech have sought to play down prospects of a tapering, German Bund yields have more than doubled in the last three weeks, and are at 0.556 per cent this morning. (Yields rise when prices fall.)
  • Reuters: UK inflation surprises with slowdown, easing pressure on Bank of England. British inflation unexpectedly slowed last month for the first time since October, dousing expectations among investors that the Bank of England might soon raise interest rates for the first time in a decade. Consumer prices rose by 2.6 percent compared with a year earlier, the Office for National Statistics said, down from a nearly four-year high of 2.9 percent in May. Economists had expected the rate to remain unchanged and some of them trimmed their forecasts for price growth to just below 3 percent in 2017 as a whole after Tuesday’s figures. But BoE Governor Mark Carney said the “big picture” for inflation remained the same and the main driver was still the fall in sterling since last year’s Brexit vote.