Daily Market Brief 7 August 2017

Dollar gains push Sterling Lower

August 7th: Highlights

  • Sterling digests monetary policy reality
  • Strong employment data brings dollar correction
  • Brexit financial settlement offer likely to bring further volatility

U.K. rate hike off the table

The weakness of recent economic data releases coupled with the economic uncertainties being created by Brexit negotiations has led to a widespread belief amongst analysts that a rate hike in the U.K. is unlikely before March 2019.

BoE Governor Mark Carney was always believed to be of the opinion that even a reversal of the “emergency” rate cut that took place following the Brexit referendum would be bring unnecessary pressure on growth and wages.

The discussions at last week’s MPC meeting will have probably been mainly about the uncertainties of Brexit although when questioned by the press Carney was at pains to say that he isn’t party to the talks or the Government’s negotiating position.

Sterling is now firmly entrenched above 0.9000 versus the Euro, closing at 0.9029 on Friday. The Common currency is benefiting by default as the dollar and pound gyrate around economic and political issues.

Like for like retail sales data is released this evening in the U.K. Anything less than last month’s 1.2% increase is likely to create further weakness for Sterling. The MPC is rightly concerned about how the continuing fall in real wages will affect the consumer.

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Strong employment data brings dollar correction

Friday was the first positive day both in perception and reality for the U.S. economy and the dollar for several weeks. It is most likely a pure coincidence that the “clouds parted” just as the President left on a seventeen-day vacation.

The employment report for June was revised upwards by 4% to 231K which was in itself a surprise but this was followed by an equally strong July report. 209k new jobs were created in July. This is the first time in a year that the data has been above the 180k average in consecutive months.

The dollar corrected some of its recent falls against the pound and Euro reaching 1.3023 and 1.1775. The dollar’s recent downtrend, particularly against the single currency remains intact with strong support at 1.1610. The pound is vulnerable to further falls as the perception grows for a widening of interest rate differentials.

The U.S. employment report also showed an increase in the rate of hourly earnings growth from 0.2% to 0.3%. The recent dovish comments from FOMC members may be reversed should this week’s inflation data also show strength.

Weekend press drives speculation over Brexit bill

A report in one of the more reputable British Sunday newspapers revealed that the U.K. is going to offer a total of forty billion Euros as compensation for its departure from the EU. It is mooted that it is to be presented as three payments of ten billion in March of 2019, 2020 and 2021 with the balance payable in smaller tranches.

Such an offer was strongly denied by the Government but it seems within the “ballpark” of analysts’ expectations of what is likely to be the opening offer. This is sure to be rejected by the EU since it falls well below what would be the contractual obligation. It is however likely to bring further talk of a hard Brexit should it be confirmed as the main plank of the U.K.’s position.

Brexit is the single major driver of the U.K. economy with all other areas being affected by what happens between Davis and Barnier in the coming months.

In its quarterly inflation report, the Bank of England predicted inflation to peak at 3% in October before falling to back to 2.6% next spring. This will be treated with benign neglect since, as already mentioned, the Bank’s hands are tied regarding a change in monetary policy.

This week’s events of note

A week of data releases will be inevitably dominated by the U.S. employment report on Friday. Prior to that traders will be looking for data to back up recent hawkish Central Bank comments

  • U.K.: Like for like retail sales – A report that is becoming more influential as a guide to behaviour of the consumer. a 1.2% rise last time likely to be matched.
  • China: Trade data – Significant for the AUD which is used as a more liquid proxy for Chinese economic activity. a fall below $42 bio. in the surplus would provoke AUD selling

  • China: Trade data – Significant for the AUD which is used as a more liquid proxy for Chinese economic activity. a fall below $42 bio. in the surplus would provoke AUD selling
  • U.K.: NIESR GDP estimate – This report differs from the “official” data as it reports on the past three months rather than quarterly. Its accuracy is well regarded by the Bank of England.Growth of between 0.2% and 0.3% is expected
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  • New Zealand: Interest Rate Decision – No change is expected to the historically low 1.75%

  • New Zealand: Interest Rate Decision – No change is expected to the historically low 1.75%

  • U.S. : Producer Prices – Factory gate inflation likely to start to rise as the dollar falls to multiyear lows.
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  • Germany: Inflation – Surprising falls over the past two months likely to continue as the common currency continues to strengthen.
  • U.S. : Inflation – Still under control as rate hikes kick in but their effect dampened by weaker dollar.

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.”