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Cable on the back foot ahead of CPI

Cable on the back foot ahead of CPI

GBP
Sterling continued to drift lower during the early session on Monday as underlying sentiment remained fragile. During the afternoon there were media reports that pro-EU MPs in parliament were looking to block any ‘hard’ Brexit. Given the government’s weak position, there will be expectations that dissenters will have a strong negotiating position. Sterling recovered some ground, although the UK currency was unable to return to the 1.3000 level against the Dollar.

Brexit reports continued to be a focus with reports that the UK government will look to establish an interim customs union following the EU exit but would be able to negotiate free-trade deals during that period. This could ease Brexit concerns, although there could be strong protests within the EU.

Stronger GDP growth and production contradict slow wage growth while inflation continues to race ahead. Short-term attention will return to monetary policy with the latest UK CPI inflation data out today with expectations of a slight increase in the annual rate to 2.7% from 2.6%, still well above the Bank of England target of 2%.

USD

The Dollar’s modest recovery yesterday could be a sign that investors now see Trump’s qualm with North Korea as empty threats, causing geopolitical fears to fade and risk appetite to return.

The New York Federal Reserve survey yesterday outlined one-year inflation expectations unchanged at 2.5% whilst three-year expectations edged lower to 2.7% from 2.8%. NY Fed President Dudley stated that his opinion of the US economy has not changed much since the beginning of the year in relation to expecting another rate hike before 2018, providing the US economy remains on track. The comments triggered some adjustment in Fed Funds futures with firmer expectations of a rate hike close to 50%.

US Retail Sales are released at 1:30pm today. This data is considered a precursor to inflation, and the monthly data is expected to increase from -0.2% to +0.3%. Markets will take note of this data to see if the Federal Reserve may see more price pressure, and thus a need to hike rates sooner rather than later.

EUR

Eurozone industrial production data was weaker than expected yesterday with a 0.6% decline for June. There was also further underlying pressure for Euro strength after strong gains during the past few weeks. Markets were starting to focus on scheduled speeches by European Central Bank (ECB) President Draghi next week. There is some speculation that we will once again see a dovish stance from Draghi which will likely increase the potential for Euro movement. After pushing to an early peak around 1.1840, the Euro gradually retreated to lows around 1.1770 against the US Dollar.

This morning, the first estimate of German GDP growth in the second quarter came in at 0.6% QoQ. On the year, the German economy grew by 2.1%. The detailed growth components will only be released towards the end of the month but, based on monthly data, the economy continues firing on all cylinders. Growth was driven by public and private consumption, investment, and the construction sector. Throughout Q2, German activity indicators have reached historical highs signalling strong growth.

Data to Watch:
6:00am EUR Gross Domestic Product (QoQ) (YoY)(Q2), Gross Domestic Product w.d.a (YoY) (Q2)
8:30am GBP Producer Price Index – Output (MoM) (YoY) n.s.a (Jul), PPI Core Output (MoM) (YoY) n.s.a (Jul), Producer Price Index – Input (YoY) (MoM) n.s.a (Jul), Consumer Price Index (YoY) (MoM) (Jul), Core Consumer Price Index (YoY) (Jul)
12:30pm USD Retail Sales ex Autos (MoM) (Jul), USD Retail Sales control group (Jul), Retail Sales (MoM) (Jul), Export Price Index (YoY) (Jul), Import Price Index (YoY) (Jul)
2:00pm NAHB Housing Market Index (Aug)

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