A Day of Consolidation

Sterling steadied on Wednesday despite ongoing political concerns while the dollar declined as yields head lower ahead of today’s light data calendar.

Previous Day's Market Highlights

Sterling consolidated just above 27-month lows against the dollar on Wednesday, with market participants remaining cautious in the face of ongoing political uncertainties and the seemingly increased chances of a no-deal Brexit at the end of October after hardened rhetoric from both Tory leadership contenders. Helping to steady the pound were as-forecast inflation figures, with data showing CPI increased by 2% YoY in June, the 2nd consecutive month of CPI being in line with the Bank of England's inflation target. The core measure, which excludes food and energy prices, increased at 1.8% YoY, a sign of inflationary pressures beginning to build in the UK economy. However, BoE policy should still remain on hold for the remainder of this year, barring any policy action as a result of a disorderly Brexit. Over the course of the day, sterling added around 0.2% against the dollar, also recording a similar gain against the euro, recovering from hitting a fresh 6-month low early in the session. Despite today's consolidation, sterling is likely to remain under pressure with political uncertainties showing no sign of dissipating any time soon.

In contrast to the pound's firmer tone, the dollar sank to the bottom of the G10 leaderboard, losing 0.2% against a basket of peers, pressured by falling Treasury yields as markets once again ratcheted up their bets on the Fed cutting rates by 50bps at the end of the month. While there was no obvious catalyst for this, poorer than expected housing starts and building permits figures, along with weaker corporate results, likely contributed. Despite the market's aggressive pricing, my base case remains a 25bps cut in July, followed by a second 25bps cut in September, with economic fundamentals giving little reason for an such a significant cut this month. The euro took advantage of the greenback's weakness, in addition to better than expected CPI figures, to add 0.2% over the course of the day. June's CPI increased by a better than expected 1.3% YoY, though this remains well below the ECB's price target, doing little to dampen expectations of additional stimulus soon being provided, especially with weak economic momentum persisting. 

Elsewhere, the kiwi dollar was Wednesday's best performer, rallying to a 3-month high against the dollar. The move comes despite the high chances of the RBNZ announcing another rate cut in early August. The Aussie dollar was also relatively well supported, despite a mixed labour market report overnight. Data showed unemployment unchanged at 5.2%, however June's net employment change was just 0.5k - relatively disappointing numbers considering the RBA's dovish policies. Meanwhile, the Canadian dollar was well-supported, adding 0.3%, after an as-expected CPI release, 2% YoY, showed the Bank of Canada likely to  maintain their recent upbeat tone. 

In other markets, equities on both sides of the Atlantic were pressured by poorer than expected earnings announcements on Wall Street. The pan-European Stoxx 600 closed Wednesday 0.35% lower, while the US benchmark S&P 500 was down 0.65%. Finally, crude prices slid after an unexpected rise in gasoline inventories. Both Brent and WTI settled more than 1% lower.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1070 1.1270 1.1048 1.97%
GBP/USD 1.2435 1.2784 1.2381 3.15%
EUR/USD 1.1235 1.1412 1.1193 1.92%
GBP/AUD 1.7675 1.8422 1.7630 4.30%
GBP/NZD 1.8460 1.9345 1.8428 4.74%
GBP/CAD 1.6235 1.6857 1.6145 4.22%

Today's Market Highlights

The data calendar is relatively light today, with the primary release set to be June's retail sales figures from the UK. Sales are expected to have declined by 0.3% in June, a 3rd consecutive monthly decline, showing the detrimental impact of economic uncertainties on the UK consumer. The less-volatile ex-fuel measure is also expected to record a 3rd straight decline. Such figures will do little to quash fears of economic stagnation, or even contraction, in the second quarter, with consumer spending driving  a significant portion of the UK's economic activity. A poor release, combined with ongoing concerns over the way forward with Brexit, will do little to relieve downward pressure on the pound. 

Elsewhere, a couple of second-tier releases are due from the US. Markets will glance over weekly jobless claims, expected at 216k, in addition to the Philadelphia Fed's manufacturing index. The index, a useful leading indicator of economic activity, is expected to bounce back to a more optimistic 5.0 in July, recovering from last month's 5-month low. Neither release is likely to have a significant impact on the dollar, with market participants instead continuing to focus on the Fed's likely policy path. Hence, this afternoon's speeches from FOMC members Williams and Bostic will be closely watched for any policy comments. The only other notable release from the North American session is June's ADP employment change figures from Canada, a slightly pointless release given that official labour market figures for June were released a couple of weeks ago.

Overnight, focus will switch to Japan, with June's CPI figures due. Data is expected to show the pace of price increases remaining sluggish at just 0.7% on a year-on-year basis. Both core inflation measures are also set to be subdued, at just 0.6% YoY apiece. While low inflation is nothing new in Japan, question marks continue to surround the BoJ's ability to stimulate the economy with an extremely limited policy toolkit.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Retail Sales (MoM - Jun) -0.3% -0.5%
9:30am GBP Retail Sales ex-Fuel (MoM - Jun) -0.2% -0.3%
1:30pm USD Weekly Jobless Claims (Jul 12) 216k 209k
1:30pm USD Philadelphia Fed Manufacturing Index (Jul) 5.0 0.3