What’s been happening?

Pound Sterling – UK Markets 

Bank of England Governor Carney’s reiteration that a Brexit deal would not be a material consideration for interest rates curbed support for the Pound yesterday. Political factors continued to play a key role in steering the Pound rate into today’s early trading, following Prime Minister Theresa May’s narrow victory in parliament last night where she managed to fend off a rebellion of pro – EU lawmakers that threatened to worsen a crisis over her Brexit strategy. Parliament voted 307 to 301 against an amendment to trade legislation that would have required the government to try to negotiate a customs union arrangement with the EU if, by 21st January 2019, it had failed to negotiate a deal with the bloc that offered a frictionless free trade for goods. The narrow victory is PM May’s third this week, emphasising the struggle she faces in passing legislation on one of the most divisive and significant decisions in modern British history with only a minority government and a party at war with itself. 

The UK Consumer Price Index measure of inflation remained at 2.4% for the third month in a row in June and was below the consensus forecast of 2.6%, according to the Office for National Statistics. Clothing and footwear prices fell by 2.1% between May and June, the biggest decline for the month since 2012, with the ONS reporting a greater incidence of discounting, although, there was downward pressure from computer games, toys and hobbies. Petroleum prices rose by 2.7% and the cost of diesel advanced by 2.9%, both the highest since September 2014. The latest figures signify the last take on inflation before the Bank of England policy makers decide whether to raise interest rates on 2nd August. While a hike is widely expected in financial markets, inflation last month was below the 2.5% estimate by the BoE in May. 

US Dollar – US Markets

US industrial production increased by 0.6% in June after falling 0.5% in May, according to the Federal Reserve data out yesterday. The production accelerated at a 6.0% annualized rate in the second quarter after a 2.4% growth pace in Q1 and was mainly boosted by a sharp rebound in manufacturing and further gains in mining output. However, a strong Dollar and shortage of workers pose a risk to future production growth, with factory surveys suggesting some strain in the supply chain. 

Federal Reserve Chairman Jerome Powell said yesterday that he sees the US on track for steady economic growth. The latest data which suggested that the economy has performed very well in Q2, accompanied by recent encouraging inflation readings, supported Powell’s statement. He was, however, challenged in a congressional hearing by senators worried that the US President Donald Trump’s administration’s trade policies were already damaging businesses in their districts. To which Powell responded with a reassuring tone and largely discounted the risks of possible “trade war”, instead focusing on a positive outcome if administration’s trade negotiations eventually produced a world of lower tariffs. The Dollar gained support against both the Euro and the Pound following the remarks, while Fed Funds futures indicated that the chances of a fourth rate hike in 2018 had increased to over 60%. 

Euro – European Markets

Euro area annual inflation rate was 2.0% in June, matching the estimate, and stable compared with 1.9% in May, while final core CPI dipped to 0.9%, short of the estimate of 1.1%, according to Eurostat, the statistical office for the European Union. The highest contribution to the annual Euro area inflation rate came from energy +0.76 percentage points, followed by services +0.57 percentage points. The highest annual inflation rates were recorded in Romania (4.7%), Estonia (3.9%) and Hungary (3.2%). Compared with May, annual inflation fell in three Member States, remained stable in two and rose in twenty-two. If inflation levels continue to rise, there will be more pressure on the European Central Bank to consider a rate hike sooner rather than later.

What’s coming up? 

UK: Markets will be looking to June Retail sales data which will be released tomorrow. Political factors surrounding Brexit developments are likely to continue adding pressure on Sterling support.  

US: Housing data for the month of June will be out this afternoon, followed by a speech by Federal Reserve Chairman Jerome Powell. 

EU: It looks like a data-quiet rest of the week for the Euro markets, markets will look to ECB for any indication of how the latest positive inflation data will affect their future rate hike decision.