Morning Report: 27 July 2017

27th July 2017 By: Ranko Berich

GBP Yesterday’s volatility triggered by the US Federal Reserve’s latest rate statement sent sterling higher against USD, but also created some short lived weakness against the euro. There had been little action in the morning for the pound, with the release of preliminary Gross Domestic Product Growth for the second quarter showing that the economy had grown 0.3% compared to Q1, and an annualised rate of 1.7%, as expected. The improvement seen in the retail sector was clearly the main driver of the economy. However, this is concerning given that real wages remain in contraction and we’ve already seen several wobbles in retail sales this year. Despite optimism in sector survey data, manufacturing failed to make a positive contribution to GDP growth, although recent surveys do indicate that this may change in the second half of the year. Given the significance of retail sales in the economy’s momentum at the moment, today’s release of the Confederation of British Industry’s measure of Realised Sales will take on additional importance.

EUR No headline euro data was released yesterday, but that was no barrier to further explosive euro strength against the US Dollar. The single currency surged to a post-quantitative easing high against the greenback, rounding off a spectacular rally since reaching multi decade lows at the start of the year. This morning’s data has already included GfK German Consumer Climate, which rose further into the positives on its latest survey reading, and Spanish Unemployment, which plummeted to 17.2%, compared to 18.8% last month. The figures from Spain are a particularly good indicator that the economy is moving in the right direction, as it is the lowest rate of unemployment since 2009, and down from a 2013 high of 27.2%.

USD Some marginal changes in the Federal Reserve’s rate statement were enough to send the US dollar into yet another dramatic selloff last night. The Federal Reserve’s rate statement, which accompanied its decision to leave rates unchanged, once again strongly suggested that it would begin normalising its balance sheet as early as September. However, in discussing inflation, the Fed noted that its target measures were running below target, compared to previous statements which described it as “somewhat” below. The omission was sufficient for markets to conclude the statement as a whole was dovish, and US equity markets soared to fresh new highs while the weighed US dollar index DXY fell to fresh 14 month lows. Important US data will be released today in the form of Durable Goods Orders and the Goods Trade Balance.

CAD The US dollar weakness yesterday was enough to send the Canadian dollar, once again, to another shattering high against the greenback. The loonie is now at its strongest point against the US dollar since 2015, in the immediate aftermath of the sharp oil price falls seen around that time. Elsewhere, crude oil inventories continued to post declines for the fourth consecutive week.

UK news

  • FT: Dollar at 14-month low on dovish signals from Fed Investors brush aside imminent balance sheet shrinking to dwell on inflation outlook. The dollar slid to a 14-month low and Wall Street stocks hit new highs after a dovish tone from the Federal Reserve allowed investors to push back rate-rise bets and extend the recent risk-taking mood. Markets brushed aside the Fed’s signal that it would begin shrinking its balance sheet as soon as its next meeting in September — essentially another form of monetary tightening — and chose to dwell instead on the Fed’s tacit acknowledgment that inflation remained softer than it had expected. “Nothing in this statement changes Pimco’s view that a third rate hike this year is far from a done deal,” said Richard Clarida, global strategic adviser at the California-based fund manager. “If there is no rebound in core inflation between now and December, the next rate hike may be a decision for the next Fed chair, if Janet Yellen is not reappointed.”
  • FT: Rudd promises to keep door open for EU workers after Brexit. UK home secretary breaks silence on migration as part of drive to soften exit terms. Amber Rudd, the home secretary, promised business on Thursdaythat she would not close the door to European workers after Brexit, in a significant softening of the government’s tone on EU migration. Ms Rudd, writing in the Financial Times, urged companies to put their case for a liberal migration regime and said she shared the desire of business “to continue to welcome those who help make the UK such a prosperous place to live”. More than a year on from the referendum vote to leave the EU, Ms Rudd has finally broken her silence on the future immigration system, telling employers they will have up to three years of transition to adjust their recruitment practices once Britain has left the bloc in 2019.