Morning Report: 31 July 2017

31st July 2017 By: Ranko Berich

GBP Sterling made serious inroads against USD last week, and is holding on to its progress fairly well this morning, having only slightly come off Friday’s highs. It’s been a different story against the euro, which has also been rallying against the greenback, keeping GBPEUR hovering above multi year lows. Sterling’s relatively good performance faces some major tests this week, with the release of the closely watched Purchasing Managers Indices for three key UK economic sectors. The releases begin on Tuesday with Manufacturing PMI, followed by Construction data on Wednesday, and Service sector data on Thursday. Thursday will also see the Bank of England’s latest Inflation Report, rate decision, meeting minutes, and a press conference given by senior BoE decision makers, so it’s likely to be a busy week for the pound.

EUR The euro achieved post-quantitative easing highs against USD last week, and has pared back those gains only slightly as of this morning. Friday’s data further highlighted the firm economic conditions that have underpinned the euro’s recovery, with French and Spanish Gross Domestic Product growth posting firm prints, while German Consumer Price Index inflation doubled expectations. This week will have plenty of euro data, including a few headline data prints. Today at 10:00 BST eurozone Consumer Price Index inflation will be released, accompanied by the Unemployment Rate.

USD Friday’s Gross Domestic Product Growth data for the second quarter did little to help the greenback after a week of losses, as although GDP grew at a healthy 2.6% annualised rate, there was little evidence of the sort of inflationary pressure that might prompt a hawkish Federal reserve to revise its current, ultra-cautious approach to monetary policy. Crucially, the Employment Cost Index rose only 0.5%, down from 0.8% last quarter. This will be a busy week for the US data calendar, beginning with the Chicago Purchasing Managers Index at 14:45 today and Pending Home Sales at15:00. Further PMIs will be released on Tuesday and Thursday, and on Friday the monthly Non-Farm Payrolls report will be released.

CAD Strong economic data, central bank hawkishness, and positive developments in crude oil markets have combined to create ideal conditions for loonie strength in recent months, and last week was no exception. Friday’s monthly Gross Domestic Product growth data showed the economy had grown a cracking 0.6% in May, implying a scorching 12 month growth rate of 4.6%. Strong recovery in the oil and gas sector, which is once again seeing output grow after suffering in the wake of price falls, made a big contribution to the month’s growth. Today at 13:30 BST price indices for Raw Materials and Industrial Products will be released, and on Friday labour market data will be released alongside Canada’s Trade Balance.

UK news

  • Reuters: UK will not cut taxes below European average after Brexit Britain does not intend to lower taxes far below the European average in order to remain competitive after Brexit but rather expects to keep a recognisably European economic and social model, finance minister Philip Hammond said. Hammond himself had suggested in January that Britain may have to change its economic model to remain competitive in the event that it left the European Union without having secured an agreement on market access. Hammond, who had campaigned for Britain to remain in the EU ahead of last year’s referendum, is seen as a proponent of a relatively “soft Brexit”, sometimes putting him at odds with cabinet colleagues who yearn for a cleaner break with the bloc.
  • Reuters: UK companies’ optimism on economy slips to six-month low – Lloyds British businesses are their least optimistic about the economy in six months and their overall confidence levels remain slightly below average, a survey showed on Monday, adding to a lacklustre outlook for the economy. Lloyds Bank said its survey pointed to moderate growth although there had been some improvement from a month earlier, just after Prime Minister Theresa May unexpectedly failed to win a parliamentary majority in a national election. “Confidence remains just below the long-term average and is consistent with a moderately positive pace of economic expansion,” said Hann-Ju Ho, a senior economist for Lloyds.