Morning Report: 23 May 2018

23rd May 2018 By: Ranko Berich

GBP. Sterling held steady yesterday, fending off a surge in dollar strength in the afternoon session but has started this morning solidly on the back foot, in particular against the US dollar. Mark Carney and other Monetary Policy Committee members testified to Parliament’s Treasury Committee yesterday, with little new information released. However, one item of note is that the MPC discussed the possibility of the Bank of England publishing some form of forward guidance for monetary policy decisions, like that of the Federal Reserve and Reserve Bank of New Zealand. But this was dismissed due to the BoE not wanting to lose credibility by suggesting future monetary policy decisions and not carrying them out. Today’s data keeps with the theme of inflation, with UK Consumer Price Index released alongside other price data at 09:30 BST. BoE economists will be worried that the headline inflation figure has continued to fall closer to the Bank of England’s 2% target, April’s CPI fell to 2.4% YoY from 2.5% in March.

USD. The composite dollar index rallied for another day yesterday, with the greenback making gains against all G10 currencies except sterling, CHF and JPY. The move to these so-called risk off currencies occurred due to Trump announcing that the North Korea Summit may not go as planned, suggesting that the previous date to meet in Singapore (12th June) may have to be pushed back. This comes following statements from John Bolton, Trump’s new National Security Advisor, that Libya could be the model for North Korea denuclearisation. Reactions from Pyongyang suggest that North Korea could call off the summit if discussions focused primarily on denuclearisation in return for US aid. The recent rise in geopolitical risk explains why JPY and CHF experienced significant gains compared to the other G10 currencies, as they benefit from this safe haven effect. Today at 19:00 BST, Federal Reserve Open Market Committee Meeting Minutes are released, and any hawkish discussion will add further weight to the argument for markets to imply 4 rate hikes for 2018.

EUR. The single currency started yesterday fairly well, until a raft of broad dollar strength whittled out these early gains, resulting in the euro losing out to the greenback for the day. EURUSD is on the defensive again this morning and has reached fresh 6 month lows after weak German PMI figures showed the eurozone’s biggest economy slowing further. Manufacturing PMI fell to 56.8 vs 57.9 forecast and 58.1 previously, while services fell to 52.1 vs 53 forecast and 53 previously. The composite PMI fell to 53.1, a 20 month low. In conjunction with this, French composite PMI fell to levels not seen since January 2017, with the services sub-index coming in under forecast negating gains in the manufacturing sub-index. This doesn’t look good for the Eurozone wide PMI’s released today at 09:00, with two of its largest economies posting negative surprises.

CAD. The loonie ended the session yesterday at the bottom of the G10 currency board, losing out to broad dollar strength the most. This comes ahead of falling WTI prices from a new high posted yesterday and NAFTA talks still looking delayed and weighing on the Canadian dollar.

UK news

  • Financial Times: Donald Trump blames China for problems with Kim summit. Donald Trump has blamed China for the possible delay or cancellation of a much-heralded summit on June 12 between the US president and North Korea’s Kim Jong Un.
  • Financial Times: Putin wins powers to impose tit-for-tat sanctions on west. Russia’s parliament has passed a sweeping bill that gives the Kremlin the power to ban selected exports to the US and curb imports from western countries, as Moscow seeks to hit back against US sanctions imposed on oligarchs and leading companies last month.
  • Reuters: Iran calls U.S. leaders cruel and disloyal, says armed forces “prepared”. A senior Iranian military official branded U.S. leaders disloyal and cruel on Wednesday and told parliament Tehran would not bow to Washington’s pressure to limit its military activities.