Market News & Insights
16 July 2018

Politics Dominate While the UK waits on CPI

Friday saw both the UK Prime Minister Theresa May and US President Donald Trump address the press in a conference at Oxford’s Blenheim Palace and watching it I couldn’t help but find the whole thing utterly bizarre. The elephant in the room – ‘Donald Trump states that May’s current Brexit White Paper will scrap any US-UK trade deals’ – was addressed straight off the bat and Trump’s response was perfectly fitting to any media institution that may ‘miss-quote’, ‘miss-type’ or all together miss the point of his statements; “That’s fake news.”. Trump made sure to further drum home the fact that he had not criticised May after criticising her by stating that he doesn’t know what the UK is going to do, but whatever we do-do, “It’s ok with me.”. Well that’s good news – the UK has hope of a Trade Deal with US post-Brexit. Recent headlines and the growing prospect of a global trade war entices a lot of hope for that. Given that Brexit negotiations and political uncertainty have driven sterling’s direction of late, currencies remained rather quiet as the market digested what influence May and Trump’s relationship would mean moving forward. Uncertainty over Brexit, combined with the fast approaching August MPC meeting, are still the main driver of sterling’s direction.

Consensus forecasts are predicting Wednesday’s CPI release to show inflation on a continued rise following April and May’s 2.4% reading rise to 2.6% in June. The trajectory of the UK’s inflation path gives the BoE their last significant economic reading ahead of August’s vote. Both the UK’s short/long term economic performance is the main concern for Mark Carney and the Bank of England as we approach August 2nd MPC meeting. The cases for and against a rate hike both have reasonable backing. With growing inflation, and should this Thursday’s Retail Sales see a positive reading, then Sterling could see marginal gains across the board whilst also strengthening the case for an August hike. Visa consumer spending rose 0.7% in June vs. 0.9% May which is the first back to back rises we’ve seen in over a year. Both the ‘World Cup Fever’ and abnormally good weather have helped drive spending on the high street. On the flip side, the BoE’s Deputy Governor Jon Cunliffe has repeatedly indicated that he’s unlikely to vote for a hike whilst urging caution on raising rates too soon. Cunliffe indicated that the lack of strong wages growth meant a “stodginess” in raising rates. Household debt is still a growing concern for the BoE as well. Market’s currently have a rate hike priced at 62% probability. Today GBPEUR has opened on the upside, holding above 1.13 with GBPUSD seeing a rise above 1.3250.

USD has opened down across the board only seeing gains against JPY and ZAR with Trump dominating most of the headlines. Donald Trump will meet with Russian President Vladimir Putin today and took the chance over the weekend to ‘down play’ the hopes of their summit. Trump is under growing pressure from other NATO leaders to query Putin on international affairs. They are set to discuss bilateral relations and national security.
Global politics are set to continue their confusing trend as Trump labelled the EU as one of the United States most significant enemies. Following this, China’s economic expansion slowed in Q2 ahead of growth taking an expected hit from recently introduced tariffs – the first indicator of the impact from the growing state of a trade war. The fundamental economic performance of the US economy should see the dollar going from strength to strength, but growing fears of a trade have hindered the dominance we saw in Q1 and Q2 of 2018. EURUSD has continued its rally following Friday’s recovery, having seen lows of 1.1624 on Friday morning, climbing above 1.17 initially on open with a tight range of 1.1691 – 1.1702.