Morning Report: 21 July 2017

21st July 2017 By: Ranko Berich

GBP Sterling weakened yesterday, but did see a minor rally against USD after news emerged of further political and legal turmoil for the Trump Presidency. June’s Retail Sales report showed an encouraging 0.6% expansion in retail sales, allaying concerns about a collapse in consumer spending, the most important element in the UK economy. However, the data was of little comfort for sterling, which, after an initial rally, sold off after the release, only managing to regain ground in the afternoon against USD. Sterling’s performance against the euro was another story entirely, with GBPEUR seeing fresh lows this morning. News headlines about Theresa May’s Cabinet accepting that the UK will continue to enjoy free movement with the EU during a transitional period has had little currency impact, and at 09:30 BST public sector borrowing figures will be released.

EUR Nothing seems to be able to stand in the way of the euro this week, and yesterday not even Mario Draghi’s best efforts could prevent further appreciation in the single currency. Although the European Central Bank kept rates unchanged and Draghi included plenty of his usual dovish rhetoric about accommodative policy remaining necessary for some time into the future, he did say that the ECB’s Governing Council would reassess the appropriateness of quantitative easing in Autumn. Yesterday’s presser may be remembered as the day the famed ‘Draghi Effect’ finally broke down. In the initial years of his ECB Presidency, Mario Draghi had an uncanny ability to immediately have his way with currency and fixed income markets, with his oft-referenced statement that the ECB were willing to do “whatever it takes” to save the euro having already been indelibly inscribed in history. Instead, markets are now looking through Draghi’s statements and instead trading the euro based on the likely path of ECB policy, which is, despite Draghi’s lack of hawkish rhetoric, nonetheless towards less accommodation, and eventually, higher rates.

USD The greenback’s miseries were compounded yesterday as news broke that special counsel Robert Mueller’s investigation into links between the Trump Campaign and Russia would be expanded to include Trump’s business dealings. Regardless of the eventual outcome of the investigation, for now the net effect on USD has been negative. An ever expanding and deepening crisis engulfing the executive branch is hardly helpful for a currency already hampered by mediocre data and legislative farce. Weekly Unemployment claims were once again exceptionally low yesterday, with just 233,000 new jobless claims, while the Philly Fed Manufacturing Index fell sharply, reflecting slower output growth among the surveyed businesses. No headline US data will be released today, but with reports emerging of the Trump administration seeking to hamper Mueller’s investigation or pardon those found guilty of wrongdoing it seems the week’s political stories are far from over.

CAD The loonie strengthened further against USD yesterday, but the gains were rather marginal compared to the sharp moves seen in recent weeks Today’s data will prove an important checkpoint for the loonie, which has risen on a hawkish Bank of Canada which took an optimistic view of the economy and promised further rate hikes in the future. The hard data must now justify the BoC’s optimism: the Consumer Price Index will be released alongside Retail Sales at 13:30 BST.

UK news

  • FT: May promises business leaders no Brexit ‘cliff edge’ for companies. PM tells first meeting of Number 10 business council she is aiming for transition deal. Theresa May has promised business leaders that she will not let companies fall over a Brexit “cliff edge” amid warnings that the City of London could haemorrhage jobs unless she delivers clarity on her exit strategy soon. Mrs May told the first meeting of a new Downing Street business council that she aimed to negotiate a transition deal — or what she calls an “implementation phase” — to smooth the exit process after Britain formally leaves the EU in March 2019. Officials close to the Brexit negotiations say Mrs May will accept an extension of free movement, and that EU citizens should be able to work freely in Britain for a two-year period after exit in March 2019, provided they register with the authorities.
  • Reuters: Sunshine lifts UK retail sales, points to brighter growth. Sunny weather brought British shoppers out and led to stronger retail sales than expected in June, shaking off a gloomy start to the year and suggesting the broader economy may be regaining speed after an early 2017 lull. More recent data have been mixed, as consumers feel squeezed by higher inflation largely driven by sterling’s fall after last year’s Brexit vote, while the Bank of England has been see-sawing over whether interest rates need to rise. Retail sales volumes rose by 0.6 percent month-on-month in June after falling 1.1 percent in May, the Office for National Statistics said on Thursday, beating economists’ forecasts in a Reuters poll for a 0.4 percent rise.