Where was Boris?
Fragile confidence in the global outlook continued to sap potential Sterling support as it slid to two-week lows below 1.2600 against the Dollar. Sterling was hampered by underlying political uncertainty as Boris Johnson remained the strong favourite to become Conservative Party leader and Prime Minister despite his ‘no-show’ at the first leadership debate. Given his commitment not to extend the Brexit departure data, there were increased concerns over the risk of a ‘no-deal’ outcome.
After Hancock’s withdrawal from the race, on Friday, there were no major political developments over the weekend with Johnson still seen as the clear frontrunner while Brexit policy remained the key focus. Overall confidence in the economic outlook remained very fragile as the British Chambers of Commerce downgraded their 2020 growth forecast to 1.0% from 1.3%. Overall, the UK currency settled just below 1.2600 and near 1.1235 this morning.
Headline US retail sales increased 0.5% for May, slightly below market expectations of 0.7%, although there was a significant upward revision to April’s data. Underlying sales met market expectations and there was also an upward revision to the previous data with a 0.5% increase for the control group and a solid overall reading for consumer spending. Industrial production data was slightly stronger than expected while the June University of Michigan consumer confidence index declined to 97.9 from 100.0 previously and slightly below consensus forecasts with a dip in the expectations component.
Although the overall releases were mixed, the robust retail sales data was significant in underpinning the US Dollar with reduced fears over a sharp slowdown in growth. Futures markets indicated a lower chance of a June rate cut and a dovish stance had already been priced in. The Dollar continued to gain support from a lack of confidence in other major currencies.
Central Bank policymakers and Draghi will be gathering today in Portugal with the topic of additional stimulus high on the agenda.
The Euro was again unsettled on Friday and this was caused by a decline in Eurozone inflation expectations, which increased market speculation that the European Central Bank (ECB) would have to take more aggressive policy action to stem the threat of deflation.
With the Euro declining to lows near 1.1200 over the weekend and an increased threat of US-European trade tensions, ECB Vice President de Guindos confirmed that the central bank will react if there is a further de-anchoring of inflation expectations but as we currently stand, this has not yet come to fruition.
Data to watch:
09:00 EUR Labour Cost (Q1)
17:00 EUR ECB’s President Draghi speech
18:30 CAD BoC’s Schembri speech
21:00 NZD Westpac Consumer Survey (Q2)