Morning Report: 7 September 2017

7th September 2017 By: Ranko Berich

GBP Although still generally continuing its recovery which began a fortnight ago, sterling is retracing this morning against most of its peers, despite a fairly positive House Price Index report from Halifax. The release showed house prices in the UK having increased 1.1% last month, which was the largest increase since January. That aside, there is little else of note by way of data for the pound today, with the next significant release being tomorrow’s Manufacturing Index.

EUR The euro faces this week’s main hurdle today, as the Governing Council of the European Central Bank meets for its latest decision on monetary policy. Though we do not expect any change in the central bank’s general monetary policy strategy, it is possible that the ECB reduces inflation forecasts for next year, given that the euro has been stronger than the ECB had originally forecast. The ECB President, Mario Draghi, himself said back in 2014 that for every 10% rally of the euro’s real effective exchange rate (REER), inflation falls by 40bp. So far this year, the euro has appreciated around 5% in terms of REER, hence a slight downward revision to inflation could be announce, and the euro could fall as a consequence. The market will also be looking to see if Draghi tries to “talk down” the euro at all, as he will almost certainly face questions from journalists on the euro’s strength at the post-decision Press Conference.

USD The dollar has had no breather, and continues to fall across the board. Yesterday was an eventful day. In first place, the ISM non-manufacturing Purchasing Managers Index, which is effectively a measure of the US service sector, fell slightly short of expectations, something that was broadly ignored after the Manufacturing PMI released last week hit a 7-year high. However, the vice chair of the U.S. Federal Reserve Stanley Fischer resigned, which sent the dollar to intraday lows, as the Fed’s hawk camp losses one of his most influential members. Lastly, Donald Trump agreed with the Democrats to extend the debt ceiling deadline until December, something that has been described by senior Republicans as an awful short term solution. Unemployment claims data will be released today and it is expected to see a significant increase, with the poor weather triggered by tropical storm Harvey being cited.

CAD The Bank of Canada surprised the market by increasing interest rates yesterday, sending the loonie more than 2% up against the dollar. The short-term interest rates in Canada are now 1%, considerably close to the Fed’s 1.25%, which has been the most hawkish central bank from all of the major currencies so far this year. As a result, the loonie reached a 2-year high against the dollar. A note of caution was diffused by the BoC though, calling for further caution ahead of future movements. Crude oil inventories data will be released today at 16.00 BST.

UK news

  • FT: Draghi faces another test to taper without tantrums Markets now watching ECB chief closely on rates as well as QE at Thursday meeting. Mario Draghi has been wrestling with a €2tn issue throughout this year — how to rein in the European Central Bank’s quantitative easing programme without alarming the markets and slowing down the eurozone’s recovery. Now, as the hour of truth looms for the €60bn-a-month asset purchase scheme — due to be discussed at Thursday’s ECB meeting ahead of a likely decision in October — attention is shifting elsewhere: notably, to interest rates. QE remains an intensely polemical topic as the ECB president can attest. Germany has always been uneasy about the bond-buying programme, while eurozone countries with lower levels of growth are much more enthusiastic about its impact on reducing borrowing costs.
  • Reuters: UK monthly house price growth hits eight-month high British house prices jumped in August at the fastest pace this year, adding to signs the housing market has regained some strength after its post-Brexit vote slowdown, mortgage lender Halifax said on Thursday. House prices increased 1.1 percent from July, the biggest one-month rise since December and building on July’s 0.7 percent increase, Halifax said. “Recent figures for mortgage approvals suggest some buoyancy may be returning, possibly on the back of strong recent employment growth, with the unemployment rate falling to a 42-year low,” said Russell Galley, managing director of Halifax Community Bank. However, falling wage growth, when adjusted for inflation, would limit the affordability of houses for some buyers, he said.