Morning Report: 20 July 2017

20th July 2017 By: Ranko Berich

GBP Sterling traded flat against USD and EUR yesterday, as markets entered somewhat of a lull ahead of today’s European Central Bank meeting. However, the pound has started this morning positively, being boosted by an above-forecast June Retail Sales report from the Office of National Statistics. After Tuesday’sInflation figures came in under expectations, the 0.6% rise is welcome news for an economy that has endured a string of disappointing readings recently. Despite this, monthly Retail Sales figures have been volatile recently, at first expanding rapidly in April due to the timing of Easter, before collapsing in May, making it difficult to judge the overall trend in the series.

EUR The euro pared back its gains versus USD slightly yesterday, but the move may be rendered meaningless by today’s European Central Bank press conference. Mario Draghi faces the difficult task of acknowledging improving economic conditions and diminished risks in the eurozone, while not sounding so optimistic that he triggers undue euro strength driven by expectations of monetary policy normalisation. May’s slowdown in eurozone inflation will make the job slightly easier, especially given that the spike seen in March. However, the ECB President will be forced to answer some difficult questions around if the overall recent improvement in economic conditions was prompting the Governing Council to discuss an eventual exit – an acknowledgement that may end up being euro positive even if Draghi makes his usual assurances about the outlook for policy remaining dovish. The ECB’s policy decision will be released at 12:45 BST, followed by the presser at 13:30.

USD The dollar continues to creep higher after the dollar index DXY reached a 10-month low on Tuesday, and is gaining against all G10 currencies. Both building permits and housing starts data bounced back yesterday from two months of contractions. Today is a slow day in the US in terms of fundamental data, and with all eyes focused on the ECB meeting today, the dollar could remain out of the spotlight. The only important release is the Philly Fed manufacturing index at 13.30 BST.

CAD Yesterday’s data showed manufacturing sales beating expectations again for second consecutive month, and posting the largest three month increase since the first quarter of 2016. At this stage, the improvement of the Canadian economy cannot be neglected and this is being reflected in the correlation between crude oil and CAD, which is falling rapidly towards this year’s lows, signalling that the Canadian dollar now ignores much of the noise coming from commodity markets and fluctuates based on its own domestic fundamentals. No data will be released today.

UK news

  • FT: Eurozone current account surplus shrinks in May. The eurozone’s current account surplus with the rest of the world shrank again in May on the back of a declining goods balance and falling income on foreign assets. The 12-month current account – a measure of the bloc’s external balance in financial flows and trade – shrank from 3.2 per cent of GDP to 3.5 per cent in May, according to the ECB. In seasonally adjusted terms, the surplus was up from €23.5bn to €30.1bn. The eurozone has swung dramatically into a current account surplus since its debt crisis struck in 2012. The balance has been driven largely by Germany, whose surplus hit a record of 8.6 per cent of GDP in 2016.
  • Reuters: Pace of British construction activity slows as Brexit delays investment. The pace of growth in Britain’s construction industry slowed over the second quarter as investment was delayed by uncertainty over Brexit and the general election, a leading property body reported on Thursday. The quarterly survey from the Royal Institution of Chartered Surveyors showed a reversal from the first quarter, which saw growth accelerate at its strongest pace since the June 23, 2016 referendum on leaving the European Union. A net balance of 21 percent respondents reported an increase in total workload in the second quarter, down from 27 percent recorded in the previous quarter, RICS said. The private commercial and industrial segments felt the sharpest slowdown.