Fuelling the Rate Cut Frenzy

The dollar gains despite a sluggish CPI figure increasing the chances of a rate cut, ahead of the first round of voting in the Tory leadership contest.

Previous Day's Market Highlights

FX markets remained largely in a holding pattern on Wednesday, with major pairings failing to break out of their recent trading ranges. The dollar gained around 0.3% against a basket of peers, despite the Fed rate cut frenzy being fuelled by another relatively benign CPI inflation release. Data showed headline CPI increasing at 1.8% on a year-on-year basis in May, the slowest pace in 3 months. The decline in headline CPI was driven by falling energy prices, down 0.6% MoM, with an increase in food prices the only area of strength. Meanwhile, the less volatile core CPI measure, which strips out energy and food prices, slid to a below forecast 2% - the lowest level since February 2018. The slide in inflation, and clear downtrend in CPI, means that benign inflation can no longer reasonably be described as “transitory” and should be enough for the Fed to adopt a clear easing bias at their meeting next week. The FOMC will likely use language similar to Chairman Powell’s recent “act as appropriate” statement, signifying their ability to loosen policy if necessary. Markets have adopted a similar stance, with a 25bps cut in July now an 85% likelihood.

Elsewhere, sterling remained rangebound, though trading conditions were once again choppy and dictated by political developments. Sterling experienced brief early gains after comments from Conservative Leadership frontrunner Boris Johnson that a no-deal Brexit is not his aim, but that the UK would leave the EU on 31st October with or without a deal. The gains were short-lived, with sterling’s rally fading after a motion that would have allowed backbench MPs control of the Parliamentary agenda, to attempt to stop a no-deal exit, failed to pass. Over the day, the pound gained 0.1% against the euro, while falling a shade under 0.3% against the dollar. 

Meanwhile, the euro held steady, with little to drive the single currency, especially with ECB President Draghi not touching on monetary policy during his speech. In contrast, the Aussie dollar has fallen 0.2% in early trading this morning after a mixed labour market report. Data showed the unemployment rate missing forecasts, holding steady at 5.2%. However, both the participation rate, at 66.0%, and employment change, at 42.3k, beat expectations, netting off some of the negative effects of a higher than expected unemployment rate. 

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1230 1.1462 1.1194 2.34%
GBP/USD 1.2690 1.2852 1.2558 2.29%
EUR/USD 1.1305 1.1348 1.1107 2.12%
GBP/AUD 1.8360 1.8617 1.8113 2.71%
GBP/NZD 1.9305 1.9678 1.9053 3.18%
GBP/CAD 1.6900 1.7245 1.6795 2.61%

Today's Market Highlights

Today’s data calendar is relatively limited in terms of top-tier releases, with the main event set to be this morning’s rate decision from the Swiss National Bank (SNB). The SNB are not expected to make any monetary policy tweaks, likely keeping interest rates at -0.75% until after the ECB have tightened policy. However, in light of a recent dovish shift in global monetary policy, the SNB are likely to strike a more dovish message than previously, emphasising the downside risks to their economic outlook. The SNB’s primary concern remains the value of the franc, due to the open nature of the Swiss economy, hence the desire to keep rates similar to its European counterpart to prevent the CHF from appreciating steeply and the high likelihood of continued FX intervention to keep the value of the CHF steady. Markets will receive the rate decision at 8:30am, before Chairman Jordan’s press conference half an hour later to expand on the decision. 

Meanwhile, focus for the pound will remain on the ongoing Conservative Party leadership contest, with the first round of voting due to take place this morning. Candidates require the 17 votes (5% of MPs) to proceed to the next round, meaning several of the crowded field are likely to be eliminated, or drop out, today. The frontrunner for the contest remains Boris Johnson, with a decision on the final 2 candidates being put to a ballot of Tory members due by the end of next week. 

Elsewhere, data is of a lower tier and unlikely to cause significant volatility. This afternoon, markets will glance over the weekly US jobless claims figure and new housing price figures from Canada - though neither could be described as impactful. Overnight, services PMI data from New Zealand will be eyed, though of more interest will be monthly Chinese ‘activity’ data, with markets continuing to try and gauge the impact of ongoing trade tensions. Expectations are for retail sales to have increased at 8.1% on a year-on-year basis in May, bouncing back from last month’s slowest increase since 2003. Also released will be industrial production figures, expected to largely hold steady at 5.5% on a year-on-year basis.

Today's Economic Calendar

Time Currency Release Consensus Previous
8:30am CHF SNB Rate Decision -0.75% -0.75%
9:30am CHF SNB Press Conference
1:30pm USD Weekly Jobless Claims (May 31) 217k 218k
1:30pm CAD New Housing Price Index (m/m - Apr) 17.5k 28.4k