The day started on a positive tone once again yesterday. In the UK the FTSE drove higher and broke the 7500 mark for the first time despite indications that inflation was growing faster than expected, at 2.7% vs 2.6% but most notably up from 2.3% in March. GBP was already in rally mode two hours before the release and while we saw a slight extension on the news, the pound quickly found itself under selling pressure with GBPUSD failing just short of 1.2960, dropping as low as 1.2865. EURGBP was soaring as the stronger single currency punished the flailing pound with EURGBP up over 1% on the day.
The single currency was flying yesterday, supported by ECB comments EURUSD rallied above 1.1100 in overnight trade helped also by a flounder greenback. The USD struggled through much of yesterday with the USD index breaking to fresh 6 month lows and is now back to levels last seen on election day. The Trump rally for the USD is now well and truly extinguished.
Another day and another Trump headline. Last night it was revealed (or accused more suitably) that Trump had tried to influence former FBI director Comey in February, asking him to drop an investigation into former National Security Advisor Michael Flynn shortly after he stepped down from the position (after ties to Russia were found).
Many are now saying that this may well be what turns the tide against Trump, I however am not so certain. He has brushed off bigger scandals quite easily in the past but for me, my focus is on the impact to policy and the US. The current administration is continuously distracted by these accusations and its impacting the ability to get anything done. That’s the real issue for the US economy right now, it remains to be seen if any of these allegation are true, one would certainly hope not although it is deeply concerning if they are.
Markets certainly were not liking this and overnight stock futures declined from near highs, US indices sold off and the USD found itself under selling pressures. Should this snowball, it will almost certainly lead to far larger declines but we cannot forget that there have been buyers on every dip this year, both in USD and equities. Away from the sideshow we are lacking any major US data so risk sentiment will remain key.
In the UK attention will turn to Labour Market Data. The rally in yesterday’s inflation figures, albeit potentially skewed by Easter, will draw even greater attention on the wage growth component. Markets expect wages to have grown at 2.3%. Many are calling for lower however and given yesterday inflation reading of 2.7% this is very bad news for real family incomes and their purchasing power is significantly impacted. However, the FTSE remains at record highs and GBP is also well off its long term post Brexit lows so many will have you believe that all is fine in the UK, there are however some very concerning developments emerging that may yet put pressure on the economy and that’s not even factoring in anything Brexit related.
GBPUSD remains pinned sub 1.3000, however despite GBP supply in the market we have yet to see GBPUSD give up support around 1.2850/60 area. As long as that holds upside remains a possibility. EURGBP found sellers just above .8600 with major support now back towards .8500/30 area.