Restrictions from the Turkish central bank limiting banks use of swap lines has had the desired effect on the TRY, the lira has now clawed back over 15% of the losses it faced on Friday/Sunday/Monday as markets stabilise somewhat. Risk appetite was more supportive through trade yesterday and equity markets were generally firmer. The USD had faced some early selling through the morning session but as the US session took hold, dollar demand dominated and the resulting selling of its most liquid counter currencies saw EURUSD press fresh lows, 1.1312 was the low print on July 5th 2017, and we’ve touched off 1.1317 this morning. The pound was also under pressure from the dollar, GBPUSD dropping to 1.2700, we were below that figure overnight but have since recovered back higher. GBP itself is still holding firm despite mixed labour market data yesterday, the headline unemployment figure dropped to 4% but wage growth was slower than expected at 2.4% and focus is on today’s inflation reading to see whether to UK is facing negative wage growth once again.
CPI inflation is expected to remain flat through July, the year on year headline reading is expected to rise to 2.5% from 2.4% and this creates a structural issue in the UK. Inflation is rising faster than earnings and the cost of living is outpacing income – not exactly the position you want your economy to be sitting in, especially when the BOE have just raised interest rates. A weaker inflation reading will be supportive of the pound today so anything below 2.5% should help GBP rally. Again the pound continues to trade heavily in oversold conditions and while we have seen some bounce back vs the euro, a recovery vs the USD is yet to materialise. EURGBP did briefly drop below .8900 yesterday on the headline unemployment figure but quickly reversed as earnings disappointed, this level provides initial support, while .8880 area acts as a larger area where euro buyers are waiting.
Eurozone data was better on the whole yesterday by the single currency still struggled to gain any meaningful traction. Industrial production, GDP and the ZEW business confidence survey were all stronger through the morning and yet the euro traded lower on the day, losing ground almost across the board. There’s very little data of note today so for euro watchers will probably be focused towards other releases. Back stateside and advanced US retail sales headline the calendar, these are unlikely to rock the market too much either way and the USD index continues to advance higher now trading at levels not seen since June 2017. We know Trump likes to comment on USD strength, especially when he feels it hurts US competitiveness and we have to take this into account when assessing USD risks. At any time the President could try and talk down the USD. That being said the Fed (are meant to) act independently and as things stand they remain well on track to raise interest rates two more times this year. Unless that shifts or Trump comments, USD strength will persevere.