I came back from a week off to what seemed like a fantasy land, Trump had effectively blown out the G7 and was en route to meet the North Korean Dictator Kim Jong-un. One of my colleagues wrote last week that you would need a PHD in politics to try and keep track of the changing political landscape we find ourselves in currently and as we awoke this morning and the headlines flashed across the screens I couldn’t help feel like a night course in fictional writing was more suitable – Donald Trump, Kim Jong-un and former basketball star/actor Denis Rodman agreeing to denuclearisation of North Korean and a push to peace with a creation of a new history. If someone had mentioned that 3 years ago we’d have sent them off to get help.
It seems completely outrageous but if Donald Trump pulls this all off he will truly make a lasting mark on this world. We’ve a long way to go before we come close to a conclusion. While last night’s pleasantries were great for headlines and Trumps’ all favoured “ratings”, there was not much meat on the bones of the signed statement and despite Trump saying it was “comprehensive” we’d really need to see some additional details to really assess how successful this relationship will be. There was no mention of a peace treaty with the US and North Korea still technically at war, no mention of sanctions which have crippled North Korea, in fact this is not a one way street with the US telling North Korea what to do. Kim has created a scenario where the US will negotiate with him, I am sure this position remains fragile but any progression towards peace in this world is welcomed. From a markets perspective the day had started slightly firmer, the threat of war or nuclear attack had already diminished enough from a market risk perspective to be discounted, hence the apparent progress overnight has had little impact, aside from a moderate pick up in sentiment overnight and to start the day in Europe.
Focus back closer to home and the pound has been struggling up hill. Brexit headlines and weak data all weighing on sterling and we still appear nowhere close to any agreement. First up, let’s look at the hard data. Yesterday did not paint a pretty picture of the UK economy. UK trade balance data was considerably weaker than expected, while industrial and manufacturing production data was also considerably weaker than expected. The NIESR GDP estimate through May was at .2% vs.3% (three month rolling) and on top of all this we see continued headlines highlighting the disappearance of the UK high street which carries considerable implications to the labour market. That leads us into today’s data releases with unemployment figures due, the headline rate expected to remain unchanged at 4.2% (recent headlines would not be in the figures yet), while weekly earnings are expected to remain at 2.9%. Unless we see a decent rise in earning above 3% GBP is unlikely to find itself much of a recovery.
In the political landscape PM May continues to struggle to appease her own government let alone the EU. She constantly appears to be extinguishing one flame in house to find another ember has taken hold. In a week of “symbolic” votes, May postponed a vote that could have seen parliament vote to keep the UK in the EU customs union. As mention this would have been purely symbolic but the government could still see another vote which carries significantly more weight and could potentially see parliament given unprecedented powers to direct Brexit negotiation if they’re not happy with the deal offered in autumn. EURGBP has extended to the very top end of its 3 month range, .8844 marks the high point of that range, we saw .8838 trade on Thursday and .8831 was the high yesterday. A break above the .8850 area will likely see progression to the top of the larger range towards .9000. GBPUSD looking a tight range for the last week, 1.3300 to 1.3470, with larger downside towards 1.3200 likely to hold even in the face of weaker employment data.
German ZEW data headlines the rest of the European calendar, given the lack of ability for this release to shift ECB expectations I can’t imagine we’ll see too much shift in the euro either way. CPI data headlines the US calendar, with inflation expected to rise to 2.7% from 2.5%. Now this reading will likely to be taken in context as to what is expected from the Fed tomorrow in their meeting. Markets are expecting a 25bps rise from the Fed tomorrow evening and this is all but priced into the USD. A weaker inflation reading will likely see USD selling. Tomorrow’s announcement will be interesting, given the guidance from the Fed the last 3 rate hikes have all been pre-priced in, with the USD in fact facing selling once the rate hikes are confirmed. If this is confirmed tomorrow, and perhaps a dovish hike from the Fed, then the greenback will almost certainly see further selling despite a rate hike. EURUSD rebound from 1.1500 was confirmed last week with the breakout from its downtrend channel which took us from 1.2500 area right down to 1.1500. The rebound has stalled but EURSD could still see a press towards 1.2000 before it turns negative again.