Daily Market Brief 5 July 2017

U.K. data clouds rate hike picture

July 5th: Highlights

  • Manufacturing and building sectors slowing
  • Price wars belie underlying inflation
  • Yen gains as N. Korea test missile

Concerns over economy push pound lower

The slowdown in economic activity that has been concerning Bank of England Governor Mark Carney has continued this week. Manufacturing and construction activity indexes have been reported and both show a drop from last month. Both sectors are still expanding but at a slower rate than had been seen.

The next meeting of the Monetary Policy Committee will be on August 3rd so there will be plenty of empirical evidence on which the members can base their decisions. With Chief economist Andrew Haldane making “hawkish noises”, Governor Carney now leaning towards a hike and Michael Saunders and Ian McCafferty already voting hike, the new member, Silvana Tenreyro faces a “baptism of fire” at her first meeting. Were Tenreyro’s predecessor Kristin Forbes to still be in situ, a hike would be a foregone conclusion.

Sterling, which had been trading close to a six-month high, closing above 1.3000 for the first time this year, has corrected but remains supported at 1.2880. Versus the Euro, strong buying interest remains above 0.8800 as the interest rate outlook for both currencies remains similar.

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U.K. inflation picture clouded by retailer’s concerns

The true picture of the outlook for both inflation and retail sales in the U.K. is being blurred by the willingness of retailers to absorb price rises to maintain market share. A price war that has been prevalent between the major supermarket chains is beginning to spill over into other retail areas such as clothing and electricals.

The rate of producer price increases has fallen a little since the major jolt from the precipitous fall in the value of the pound following the Brexit referendum but continues to be unusually high. This is not feeding through as much as would have been expected meaning that retailers are cutting their margins to maintain market share.

It is easy for analysts to conclude that wherever the “slack is being taken up”, if the consumer keeps spending all is well. However, this is an unsustainable situation as one major supermarket chain, Tesco, has already announced job cuts as a further cost cutting measure.

Furthermore, the fall in the oil price, WTI fell by 18.5% before a minor recovery, has seen petrol prices fall, also dampening inflation. As ever, the devil is in the detail but the overall conclusion is that inflation is a long way from being under control in the U.K.

Kim continues to “tug the tiger’s tail”

North Korea launched another missile test yesterday under the watchful eye of their Leader Kim Jong Un. Kim seems intent on furthering his country’s nuclear ambitions no matter the consequences for his people. The economy has been crippled by sanctions, millions do not have enough to eat, yet Kim continues to reserve his country’s right to nuclear weapons.

Nuclear non-proliferation treaties have been signed by U.N. members limiting both the development of new weapons and limiting first strike capability. Iran has, apparently, abandoned its nuclear programme leaving North Korea as the sole “rogue state”.

The response for the U.S., Russia and China was as expected but as the range of the rockets comes closer to the U.S. mainland a military response becomes ever more likely.

The effect of this tension on the financial markets was for the JPY to gain in value along with the CHF as risk aversion set in. Both gained about 0.5% with further gains likely since no end to the standoff appears likely.

RBA Holds Rates and cools rate hike talk

The Reserve Bank of Australia met overnight to decide on interest rates. In contrast to recent comments, the RBA feel that the effect on the housing market and a stronger currency from higher interest rates would lead to an economic slowdown. They signalled that they are unlikely to hike rates anytime soon. “Business conditions, particularly capacity utilization have improved recently but the risks of hiking outweigh the benefits for now.”

The AUD fell to a low of 0.7603 and looks likely to test support at 0.7550.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”