Monday, July 30th
The Pound stayed in recent ranges last week as it waited for this week’s BoE inflation report and interest rate decision. The market gives a decent probability of a rate hike with the logic being two pronged. Firstly, that UK’s central bank is forward looking in its inflation outlook and with unemployment at 4.2% it can reasonably expect average wage earnings to increase from their 2.5% level.
Secondly, that as we are already some nine years past the last recession it won’t be too long before the UK economy starts to slow again. In this case, the BoE will need to support the economy and with interest rates at 0.5% there isn’t much room to cut rates.
As for Brexit, the weekend press noted that Italy has accused the EU of trying to “swindle” the UK out of the Brexit that the public voted for. This could provide a glimmer of hope for the UK government as it tries to get member countries of the EU to give the seal of approval to its white paper for a soft Brexit. It is also ominous for the EU as it shows that Italy is extremely dissatisfied with the EU and its behaviour and rules.
The Euro has also been trading in recent ranges against the Dollar over the past few weeks. Traders were not given a huge reason to change anything after the ECB held rates steady and didn’t change anything substantial in its forward guidance.
Tomorrow will be important as we have the release of CPI and GDP. We expect headline CPI to be 2.0% (with Core CPI 1.0% again) and GDP to be 0.4% QoQ, the same as last quarter. It will take some time but last week’s trade agreement between the EU and US could see confidence return to German exporters. Tuesday sees the release of the important Swiss KOF economic barometer.
Last week saw an excellent US GDP print of 4.1%, which not really engenders US Dollar buying. The reason for this being that is the market had been told to expect a good figure and as such it was already “priced in” to the market. This week we have Core PCE (personal consumption expenditure) for release on Tuesday, with the market keen to see if the data will keep the Fed hiking four times this year.
We also have non-farm payrolls data and average hourly earnings announced this Friday and expect 195k new jobs to be added to the US economy, with an increase of 0.2% in average hourly earnings. We also expect many tweets from the President. Possibly denials over the Muller investigation and whether he knew of a meeting that his son-in-law attended, which promised “dirt” on Hillary Clinton and possibly more detail on last week’s trade agreement with the EU.
The President has agreed to attempt to resolve all steel and aluminium tariffs and related retaliations, as well as promising not to levy tariffs on EU car imports. In return for these actions the EU will “almost immediately”increase its purchases of soybeans (which China has stopped buying), import “massive” amounts of American liquid natural gas as well as work towards zero tariffs, and the removal of all trade barriers for non-car industrial goods.
Importantly the US and EU will work together to end the theft of intellectual property, forced technology transfers, industrial subsidies to state owned enterprises and the use of excess capacity to drive global prices below cost. In short, China is firmly on the “naughty step”. We have the FOMC meeting on Wednesday but expect no change to interest rates.
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