Central Banks take centre stage
Sterling had a sluggish start to yesterday after reports of a potential leadership challenge to Theresa May, dragging the Pound to lows of 1.2980 against the Dollar. The move was temporary and softer US PPI figures helped weaken Dollar sentiment.
The pair got an additional boost after the Wall Street Journal reported that the US Treasury Secretary Steven Mnuchin sent a letter to Chinese officials to propose trade talks in the next few weeks, which exerted some additional downward pressure on the greenback. By late afternoon, positive Brexit headlines that the EU would start redrafting the Irish Brexit protocol triggered a push towards, but just short of, 1.3100 against the Dollar. Against the Euro, the Pound peaked by mid-morning at 1.1248, falling just under 1.1200 by mid-afternoon before regaining all losses by market close.
Today’s focus is the Bank of England (BOE) monetary policy meeting. As stronger than expected UK wage growth is unlikely to alter the immediate outlook for monetary policy, the next rate hike is expected in May 2019. However, the rhetoric of the BOE’s statement will be scrutinised for hints on the bank’s rate hike outlook, especially as we’ve previously heard Mark Carney state that “Sterling is undervalued”. Any repetition of this could trigger another Sterling rally.
The big story in the US yesterday saw officials, led by Treasury Secretary Steven Mnuchin, inviting their Chinese counterparts, including Vice Premier Liu He, to hold another bilateral trade meeting. The development came as more than 85 U.S. industry groups launched a coalition to take public its fight against President Donald Trump’s trade tariffs. We saw a recovery in the risk sentiment and broad-based US dollar softness following news that the US is reaching out to China to a start fresh round of trade talks.
Trump’s tariffs have escalated far beyond what business groups once imagined, as the administration prepares to activate duties on $200 billion worth of Chinese goods, hitting a broad array of internet technology products and consumer goods.
Later in the day, the spotlight turns to US CPI data. A move down in the headline inflation rate is expected, but an unexpected jump in wage growth may foreshadow an upside surprise. In this case, it’s likely we see a hawkish adjustment in the prevailing Fed policy outlook that may put the US Dollar back on the offensive.
Yesterday EU data performed poorly, as industrial production fell -0.1% YoY (below market expectation of a 1.0% YoY rise) and industrial production decreased -1.8% MoM for July (market expectation was -0.5%). Despite this, the GBP/EUR rose to above the 1.12 mark and the EUR/USD figure hit a high of 1.1649 before cooling off slightly.
Today is a big day for data in the Eurozone, with the European Central Bank meeting dominating the news. Consensus is that they will reduce the volume of its QE programme from 30 to 15 billion Euros per month. It is also going to release its interest rate decision and its deposit rate decision at 12:45, with the press conference at 13:30.
There is the consumer price index out of Germany and France, as well as producer and import prices out of Switzerland. Finally, the most volatility is expected around the Bank of England’s interest rate decision, monetary policy summary, and the minutes.
Data to watch:
11:00 GBP BoE Interest Rate Decision
11:00 GBP BoE Asset Purchase Facility
11:00 GBP Monetary Policy Summary
11:00 GBP BOE MPC Vote Unchanged
11:00 GBP Bank of England Minutes
11:00 GBP BOE MPC Vote Hike
11:45 EUR ECB Interest Rate Decision
11:45 EUR ECB Deposit Rate Decision
12:30 USD Continuing Jobless Claims (Aug 31)
12:30 USD Initial Jobless Claims (Sep 7)
12:30 USD Consumer Price Index