Daily Market Brief 13 June 2018

Sterling barely moved as May wins first vote

June 13th: Highlights

  • Wage data confirms protracted economic weakness
  • Trump/Kim; a win for Pyongyang?
  • Euro awaits hawkish rhetoric, poised for disappointment

Brexit remains the only game in town

Wage inflation data, which has been one of the planks of MPC members demands for rate increases was released yesterday as part of the employment report and showed that in May wage increases fell back to 2.5% for the three months to April from 2.7% previously.

Sterling was barely moved by the data as Brexit remains the sole driver of the currency. The “Brexit Bill” is being debated in Parliament and a major concession by Prime Minister May allowed the Government to win the first vote despite rebellions from both sides. The vote was on what powers Parliament will have once an agreement is reached with Brussels and its terms are put to MP’s. MP’s wanted the power to send the Government back to renegotiate and that was defeated.

Sterling had a wide range, trading between 1.3425 and 1.3342 versus the dollar but closed almost unchanged at 1.3372. It was a similar story versus the single currency, moving between 1.1402 and 1.1322 and closing at 1.1377.

Today’s release of inflation data is likely to be treated in a similar fashion to the employment report unless there is a major surprise.

Year on Year, inflation is expected to have risen back to 2.5% following last month’s fall to 2.4%.

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Trump/Kim more show than substance

It is difficult to see the benefit to President Trump of yesterday’s much heralded summit with North Korean leader Kim Jong-un in Singapore. Trump’s very presence was a massive concession in that it provided Kim with the global presence he has craved during the entire nuclear standoff.

Trump also surprised America’s allies in the region by calling off proposed military exercises with the South as a further concession. The U.S. only has one demand from Pyongyang and that is to halt the manufacturing of nuclear armed missiles. So far, there is no word on that but Kim (and Beijing) are surely extremely pleased with the talks went.

Today the FOMC concludes a two-day policy meeting and it is almost certain that they will conclude by raising short term interest rates by 25 basis points. This in itself is widely expected and it is the outlook for the rest of the year that will interest traders.

Jerome Powell is likely to be cautious in his comments probably saying that “Fed actions will be determined by the path of economic data” or something very similar. He is unlikely to be any more positive about whether there will be one or two more hikes this year.

The dollar index rose to a high of 93.91 and closed close to that level, as risk appetite was improved by the outcome of the Singapore summit.

ECB, the centre of attention

Traders have waited a very long time for any hawkish comment for an ECB policy meeting.

Following the financial crisis which hit the Eurozone very hard, the subsequent debt overhang has been, whilst not completely ignored, placed on the back burner. This has led to a continuation of extremely loose monetary policy and the continuation of the Asset Purchase Scheme. Although it was cut back from sixty billion euros a month to thirty billion last October, it reached close to 2.4 trillion euros by April of this year.

Whilst the markets await the reduction of the purchases leading to the scheme’s removal, little thought has as yet been given to the outcome. Will the short-term paper be held to maturity and how much of the long-term bonds will be returned to the market? This will be of particular interest in Rome since Italy has been the major beneficiary of the scheme.

Given that the new Italian Government will need to increase its sales of fresh debt to fund its tax reform and welfare policies, it will most likely be expected to pay a high price as the spread between German and Italian bonds widens.

The single currency fell a little yesterday following a certain amount of positivity around the dollar but remains in a narrow range awaits tomorrow’s meeting. It closed at 1.1745 down from an opening level of 1.1783.

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.”