There’s plenty to keep our attention this week in markets and while closer to home the focus is on Brexit, a more pressing matter for the EU could well be the recent political developments in Italy. Yesterday it was tough to get away from the cries of rising Italian bond yields as markets moved back to crisis style yield watching, shouts across the office floor, headlines flashing on news services – it was a throwback to the Greek style debt crisis (pick any one for reference). While the situation was nowhere near those levels of extremes, it certainly merits considerable focus and could well be a growing area of concern for EU lawmakers and the ECB.
In US markets yesterday, most were happy to maintain a positive sentiment through much of the day, buoyed by the apparent progress with China on trade talks. The greenback had rallied through much of the opening of the week on this trade talk but within a couple of hours of the European session starting the dollars’ gains had started to fade. GBPUSD and EURUSD both bouncing from the lowest levels of the year, 1.1715 area highlighted yesterday as EURUSD proving strong enough for a near .75% bounce. GBP was broadly weaker on the day and despite sterling rebounding from its lows with GBPUSD, it still closed the day lower despite USD selling through much of the day while EURGBP also traded up as high as .8783 and into decent euro resistance.
There’s a very active day for GBP today and while major data points are to a minimum, with only borrowing and public finance data on tap, it will be commentary from BOE members that will likely be grabbing headlines. Carney, Ramsden, Saunders and Vlieghe are all speaking and will be commenting on the recent inflation report, that is due to kick off in the next 20 mins so we could well see some early morning sterling fireworks. Needless to say inflation is a key priority for BOE and for me will remain a primary point in driving policy. As I’ve highlighted before, if the BOE were willing to raise rates from a weak economic position to address above target inflation, then this is the figure we need to watch closely, and the inner workings of the MPC’s thought process will be vital to assess and today provides just that opportunity.
There’s not much to attract our attention into the afternoon session so it will be back to headline watching and potentially a long hot afternoon. A point to note, yesterday there was several very hawkish comments from Fed members, (1 non-voting, 1 voting) and yet the dollar struggled to find any traction whatsoever against its G7 counterparts, however did see gains vs emerging markets. It will be interesting to see how this plays out but given the greenback’s current positioning, should we see a lack of strong support for three rates hikes from the Fed this year or any slight indecision, then the USD can face some selling. For now the market is certainly happy to continue to buy the USD on any dip, so should continue to see some support.