Trade Truce Fuels Risk-On Rally

The dollar gains and equities rally as the US-China trade truce lifts risk sentiment while the RBA cut rates and global manufacturing activity softens.

Previous Day's Market Highlights

July began with markets in a risk-on mood in reaction to the agreement of an open-ended trade truce between the US and China at last weekend's G20 summit. The dollar rallied to its best levels in a week, adding 0.5% against a basket of peers, as the immediate chances of further tariffs being imposed on Chinese imports receded. The greenback's gains were aided by better than expected manufacturing PMI figures, with the ISM gauge reading 51.7 in June, above the 51.0 forecast though still the slowest pace of expansion since September 2016. The pace of expansion came as a surprise, especially after recent regional Fed manufacturing surveys pointed to softer activity in the sector. Nonetheless, the details of the report were not as positive, with gauges of new orders stagnating and prices paid decreasing, indicating the potential for further weakness in the manufacturing sector going forward. 

Elsewhere, manufacturing PMIs were also the order of the day in both the UK and eurozone, with both measures softer than expected. In the UK, the PMI figure printed 48.0 last month, signifying back-to-back contractions in the industry and the weakest level since February 2013 as the impact of pre-Brexit stockpiling continues to unwind. Sterling was initially pressured by the release, though recovered some ground throughout the day. The pound closed around 0.4% lower against a stronger dollar, while recording a gain of 0.4% against the euro as the common currency slipped. From the eurozone, the PMI survey confirmed a 5th consecutive contraction in the manufacturing sector last month, with the index falling to a 3-month low of 47.6. The euro was also pressured by political factors, with EU leaders still yet to agree on who will fill numerous top jobs across the European Union (including the ECB Presidency). Talks are set to continue today. Meanwhile, the single currency shrugged off unemployment falling to its lowest level since 2008, with upward pressure on wages yet to materialise. Over the course of the day, the single currency fell to a 1--week low against the dollar, losing 0.7%. 

Overnight, the Reserve Bank of Australia (RBA) have announced a 2nd 25bps interest rates in as many months, bringing the cash rate to a fresh record-low of 1.00%. The RBA's cut is a further attempt to make inroads into the spare capacity in the Australian economy, helping to lift inflation towards target as well as reducing unemployment. As flagged yesterday, a rate cut had been around 80% priced in before the decision, which, combined with any explicit mention of further policy easing, has helped the Aussie dollar to gain around 0.25% after the decision. 

In other markets, equities rallied on both sides of the Atlantic, with the US-China trade truce helping to fuel gains. The pan-European Stoxx 600 closed 0.8% higher, while the US benchmark S&P 500 added 0.75% to close at a fresh record-high. Finally, oil prices firmed after OPEC extended current production cuts for another 9 months, despite lingering concerns over demand in 2020. Global benchmark Brent added 0.5%, while US WTI crude added 1.1%.

Currency Pairing 08:00 Today Vs 08:00 Yesterday Four-Week High Four-Week Low % Change
GBP/EUR 1.1195 1.1331 1.1120 1.86%
GBP/USD 1.2645 1.2784 1.2506 2.17%
EUR/USD 1.1290 1.1412 1.1181 2.02%
GBP/AUD 1.8105 1.8422 1.8032 2.12%
GBP/NZD 1.8960 1.9414 1.8830 3.01%
GBP/CAD 1.6585 1.7068 1.6547 3.05%

Today's Market Highlights

Today's sees a quieter economic calendar, with data releases largely of a lower tier. From the UK, while focus remains on the ongoing Conservative Party leadership contest and Brexit-linked uncertainties, construction PMI figures will provide a piece of the jigsaw when gauging economic performance over the second quarter. The data is expected to show the construction sector remaining in contraction for a 2nd consecutive month in June, with the index set to rise modestly to 49.3. Of more interest to markets will be a speech this afternoon from BoE Governor Carney, with any monetary policy comments likely to reiterate the necessity for rates to rise faster than the market currently prices should the Bank's economic forecasts prove correct. Such comments may provide some support to the pound, though policy tightening this year remains unlikely. 

Elsewhere, data is unlikely to have a significant impact on price action, with the risk-on feel set to continue dominating as US-China trade relations continue to thaw. From the eurozone, PPI figures are expected to have increased by 1.8% on a year-on-year basis, potentially of concern for the ECB should soft producer price inflation feed through into more benign CPI. Across the pond, no notable releases are due from the US, while Canada releases manufacturing PMI figures, a day late due to yesterday's public holiday. June's PMI index should confirm the sector remaining in contraction for a 3rd consecutive month, with the consensus estimate of 49.0 set to be the lowest level for the index since December 2015. 

Of more interest than data releases are likely to be central bank speakers, with monetary policy remaining in focus as policymakers shift to a more dovish policy stance. BoE Governor Carney is not the only central bank chief speaking today, with RBA Governor Lowe due to provide remarks this morning. Markets will be looking for comments surrounding yesterday's decision to cut rates, specifically whether signs of further easing are on the horizon. Meanwhile, from the Fed, comments from typically hawkish FOMC members Williams and Mester will be eyed as markets continue to price in 75bps of easing this year, with a July rate cut currently seen as a certainty according to futures contracts.

Today's Economic Calendar

Time Currency Release Consensus Previous
9:30am GBP Construction PMI (Jun) 49.3 48.6
10:00am EUR PPI (YoY - Jun) 1.8% 2.6%
10:30am AUD RBA Gov. Lowe Speech
2:30pm CAD Manufacturing PMI (Jun) 49.0 49.1
3:05pm GBP BoE Gov. Carney Speech