Choppy trading thanks to Brexit
With no market data for the UK, the market’s eyes were swayed to a new, developing Brexit story. Cabinet office minister David Lidington confessed Prime Minister May’s Brexit customs plan had lawyers looking into the legality for trading with the European Union after Brexit. The cabinet is further split in their opinion with serious concerns about the technical details. With increasing pressure building over May and her leadership, this could certainly pose a risk to the future of Sterling.
Reports also came out of Morgan Stanley yesterday that their strategists were preparing to invest in the Pound. That said, the investment bank did warn that further devaluation was expected first but this would be wrapped up by a completion in Brexit negotiations and a number of interest rate rises.
All things considered, the Pound saw a choppy trading session yesterday with Cable dropping in the early parts of the UK trading session before making gains as the New York session opened. Cable closed the day below the 1.3500 handle. Against the Euro, the Pound rose in the early parts of the trading session again before closing around the day lows in the 1.1400s.
US housing starts data printed an annualised rate of 1.29mn for April compared, somewhat below expectations of 1.31mn, however March’s data was revised up. Building permits were above market expectations at 1.35mn from 1.37mn. Industrial production increased 0.7% for the second successive month.
Atlanta Fed President Bostic stated that he expected between two and four rate increases this year. Although he also stated that the expansionary fiscal policy could lead to a faster pace of Fed normalisation, there was no shift towards a more hawkish policy stance. The Dollar continued to gain support from the US outlook being more positive than the rest of the global economy, although the Euro recovered later in the US session.
The Euro is under increased pressure because of Italy’s heightened political uncertainty, and recent soft patch in Eurozone data. Reports that the Five Star Movement and the League, which are in talks to form a coalition government, are considering a debt relief from the European Central Bank (ECB) to the tune of €250 billion has stoked fears over Italy’s creditworthiness.
Eurozone inflation numbers confirmed the flash estimates of 1.2% year-on-year headline inflation and 0.7% year-on-year core inflation (excluding food, energy, alcohol and tobacco), as widely expected. Super core inflation (the approximate half of core inflation that is responsive to the business cycle) was unchanged at 1.1% year-on-year.
The contribution from German inflation is already where it should be and the change that the ECB is hoping for in the coming months is essentially a normalisation in France and Italy. The ideal situation is where output gaps remain negative and inflation is pulling the Eurozone aggregate down, but the figures largely met forecasts and as a result had no notable impact on Euro trade.
Data to Watch:
02:30 AUD Unemployment Rate s.a. (Apr)
02:30 AUD Employment Change s.a. (Apr)
03:00 NZD Budget Release
11:30 EUR ECB Vice President Vitor Constancio speech
13:00 EUR ECB Vice President Vitor Constancio speech
13:30 USD Initial Jobless Claims (May 11)
13:30 USD Continuing Jobless Claims (May 4)
13:30 USD Philadelphia Fed Manufacturing Survey (May)
15:45 USD FOMC Member Kashkari Speech
17:00 GBP MPC Member Haldane Speech
18:30 USD FOMC Member Kaplan Speech