Morning Report: 26 July 2017

26th July 2017 By: Ranko Berich

GBP Sterling saw a short lived burst of strength against the US dollar yesterday afternoon that has since dissipated to leave GBPUSD trading slightly lower than yesterday’s open. The Confederation of British Industry’s Industrial Order Expectations index was released yesterday, and rose from a reading of 1 to a reading of 10, indicating a strong increase in incoming orders. The survey of just under 400 manufacturers also found head count rising at the fastest rate in three years. Today at 09:30 BST preliminary Gross Domestic Product growth for the second quarter will be released, coming at a crucial time for the pound which is hanging on for dear life against the euro and only resisting USD due to the greenback’s own weakness. Median expectations for the release are for 0.3% growth, a marginal improvement on last quarter’s 0.2%. Survey data suggests that this estimate is conservative, or even low, while hard economic data that have already been released for the quarter suggest it is too optimistic. The real release at 09:30 is therefore something of a wild card and has the potential to move sterling significantly.

EUR The Monex team is running out of pithy one liners for describing euro strength, but the single currency knocked down yet another door against USD yesterday. EURUSD rose to within two pips of the highest level on EURUSD since the commencement of the ECB’s main quantitative easing effort, before falling back slightly. The German IFO Business Climate survey may have been behind some of the momentum, after the index rose to a record high and IFO’s Chief Economist described businesses as “euphoric”. No headline euro data will be released today, but the single currency is not short of momentum at present.

USD USD saw a major selloff in the afternoon yesterday, but has since recovered somewhat. Some rather punchy Consumer Confidence figures helped the dollar recover, as the index approached a 16 year high. Sub-indices tracking perceptions of the job market made the case for US dollar strength in stark terms: the percentage of those saying jobs were “plentiful” outstripped those saying employment was “hard to get” by 16.1 points, the highest margin since 2001. Despite the increasingly robust health of the labour market, wage inflation has yet to take off in the US, as in the rest of the developed world. The Federal Reserve must grapple with this conundrum, which challenges decades old economic models that underpin conventional monetary policy, and must do so at this week’s meeting. The Fed’s latest rate decision will be announced at 19:00 BST tonight, alongside a revised statement. Given the recent slowdown in headline inflation and the lack of acceleration in wage growth, little change to the statement is likely, and the chance of a rate hike is negligible.

CAD The loonie made further inroads, and a fresh high, against the US dollar like the rest of the G10 currencies yesterday, before falling back slightly. Yesterday marked the eighth consecutive day of fresh lows on USDCAD, indicating just how relentless the loonie’s appreciation has been recently. No Canadian data will be released today, but with important events scheduled in the US, particularly crude oil inventories at 15:30 BST and a rate announcement at 19:00 the potential for USDCAD volatility is high.

UK news

  • FT: UK business secretary rules out post-Brexit protectionism. Greg Clark, Britain’s business secretary, insisted that nobody voted for Brexit to “trade less”, as he stepped up his joint campaign with chancellor Philip Hammond to keep borders open when Britain leaves the EU. Mr Clark celebrated the UK’s complex supply chains as “a triumph of 21st century industry” and said there was no question of retreating to be “a Good Life Britain of self-sufficiency”. The quietly spoken minister has in recent weeks worked closely with Mr Hammond to push the cabinet towards a more business-friendly path to Brexit, including a transition deal lasting for two or more years after exit in March 2019.
  • Reuters: UK factory output rises at fastest pace since 1995 – CBI. British factories increased output at the fastest rate since the mid-1990s over the past three months, according to a survey published on Tuesday that suggested manufacturing might help to support the economy as it slows during 2017. Manufacturing accounts for about one-tenth of Britain’s economic output. The Confederation of British Industry’s quarterly balance for manufacturing rose to +31 in the three months to July, the highest reading since January 1995 and up from +22 in the three months to April. In July alone, however, new orders slowed slightly more than expected, to +10 from +16 in June.