A Tentative Truce?

Risk appetite improves as signs of a US-China trade truce emerge, supporting the dollar and denting demand for safe-havens.

Previous Day's Market Highlights

The dollar gained and demand for safe havens decreased on Wednesday as market participants grew more optimistic of US-China trade talks at the G20 summit yielding a positive outcome. Risk sentiment improved early in the session after upbeat comments from US Treasury Secretary Mnuchin stating that he believes “there’s a path to complete this [the deal]”. This was later followed by overnight reports (via Reuters) of a tentative truce being brokered between the two nations, even before official talks scheduled for Saturday (UK time) began. The positive reports on trade supported the dollar, with the greenback gaining around 0.2% against a basket of peers, recording back-to-back gains for the first time in over a week. The dollar shrugged off a relatively lacklustre durable goods orders report, which showed orders declined by 1.3% in May, a 2nd consecutive monthly decline and softer than expected. Markets also largely ignored President Trump’s latest tirade, including yet another attack on Fed Chair Powell. 

The dollar’s gains, improving risk sentiment, and falling Treasury yields resulted in diminished safe-haven demand. This was evidenced by the yen losing 0.6%, its biggest daily loss against the dollar since mid-April, while the Swiss franc also fell, losing around 0.2%. On the other hand, increased risk appetite among market participants helped both the Aussie and Kiwi dollars to record gains of more than 0.5%, the latter being aided by an unwinding of short positions after the RBNZ kept policy unchanged. The Canadian dollar was also well-supported, aided by a sharp rise in oil prices, with the loonie adding 0.4% over the course of the day. 

Closer to home, the pound traded largely unchanged, respecting its recent trading ranges, as BoE policymakers gave markets little in the way of fresh information at their Inflation Report testimony. Governor Carney reaffirmed that the policy response after a potential no-deal Brexit is not automatic, and that the BoE’s current forecasts don’t incorporate the risk of a no-deal - something that appears priced into financial markets. Other MPC members reiterated the BoE’s tightening bias, of gradual and limited rate increases being required, though a rate hike this year remains unlikely due to Brexit-linked uncertainty. Over the course of the day, sterling added 0.1% agains the dollar and closed unchanged against the euro, recovering from a fresh 6-month low hit early in the session. The common currency was also rangebound, trading flat against the dollar. 

Away from FX, hopes of improving US-China trade relations failed to boost equity markets. In Europe, the pan-continental Stoxx 600 closed unchanged, while the US benchmark S&P 500 recorded a 4th consecutive daily loss, falling 0.1%. Finally, oil prices surged after data showed US inventories falling by 12.8mln barrels, the biggest draw since September 2016. Global benchmark Brent added 2.21%, while US WTI crude added more than 2.5%. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1165 1.1331 1.1140 1.69%
GBP/USD 1.2670 1.2784 1.2506 2.17%
EUR/USD 1.1355 1.1412 1.1151 2.29%
GBP/AUD 1.8140 1.8422 1.8113 1.68%
GBP/NZD 1.8995 1.9414 1.8952 2.38%
GBP/CAD 1.6640 1.7068 1.6636 2.53%

Today's Market Highlights

The US remains in focus today, with the final estimate of Q1 GDP the main data highlight. Though the market impact of GDP figures tends to decrease with each revision, any deviation from the previously reported 3.1% annualised quarter-on-quarter growth, especially to the downside, will be of interest. Along with the GDP data, final Q1 core PCE figures, the Fed’s preferred inflation gauge, will also be released, expected to remain unchanged from the 2nd estimate, showing an increase of 1.0% on a quarter-on-quarter basis. In a similar manner to the GDP release, barring any surprises, market impact should be limited. Other data points from the US are of a lower tier, and should have limited impact, including weekly jobless claims, May’s pending home sales figures, and the Kansas Fed’s manufacturing index. The latter is likely to confirm the recent downtrend in activity seen in other regional Fed surveys, further increasing the likelihood of the ISM manufacturing PMI falling into contractionary territory next week. It should be noted that, despite a busy calendar, markets may be in a hesitant mood ahead of the crunch G20 summit overnight, hence volatility may remain muted. 

Elsewhere, while the UK’s calendar is once again devoid of any releases, a couple of data points are due from the eurozone. Markets examine this morning’s sentiment surveys for any signs of an improvement in economic conditions, though they are likely to remain thin on the ground. The business climate index is expected to notch a 5th consecutive decline, falling to its lowest level in almost 3 years at 0.23, while consumer confidence is set to remain firmly in pessimistic territory at -7.2. The continued pessimism across the eurozone economy is likely to further increase the chances of additional ECB stimulus being required, as the economic outlook shows no signs of brightening. Inflation data from Germany is also due, with HICP expected to remain at 1.3% on a year-on-year basis. 

Overnight, a number of releases are due from Japan. Of primary interest to markets will likely be the summary of opinions from the BoJ’s latest monetary policy meeting, set to give investors an insight into future policy action. Also due are June CPI figures for the Tokyo region, expected to show continued benign inflation of just 1.3% on a year-on-year basis, in addition to unemployment numbers, set to show the unemployment rate holding steady at 2.4%. Industrial production will also be eyed, especially as the global manufacturing sector continues to slow, with production set to have fallen by 2.6% on a year-on-year basis in May. 

Finally, the world of monetary policy has little to offer us today, with no speakers due from any G10 central bank.

Today's Economic Calendar

Time Currency Release Consensus Previous
10:00am EUR Consumer Confidence (Jun) -7.2 -7.2
10:00am EUR Business Climate (Jun) 0.23 0.30
1:00pm EUR German HICP (y/y - Jun) 1.3% 1.3%
1:30pm USD Final GDP (Q1 - q/q annualised) 3.1% 3.1%
1:30pm USD Core PCE (q/q - Q1) 1.0% 1.0%
3:00pm USD Pending Home Sales (m/m - May) 1.0% -1.5%