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July 2016

Sterling flat in spite of improved employment data

Published: Thursday 21 July 2016

  • Sterling flat in spite of improved employment data
  • NZD weaker as RBNZ heralds rate cuts
  • ECB 'no change' decision due today

Yesterday brought Theresa May's first stint as Prime Minister at question time in the House of Commons and she did very well until she slumped in her seat at the end and sighed; clearly chuffed that it was all over. Mrs May also travelled to Germany to meet Angela Merkel in pre-negotiation Brexit discussions. She was overheard to say, "It's not you, it's us", and "You're great but we just need our own space right now."
UK data included better than expected UK employment gains; something Mrs May was able to brag about in PMQs and yet Sterling remains becalmed after the furore of the past month.
Overnight the New Zealand Dollar has weakened against all major peers after the Reserve Bank of New Zealand indicated that further interest rate cuts or other monetary easing policy will be needed. The market is now pricing in a 90% chance of a rate cut at their next meeting on August 11th. The RBNZ noted that the current strength of the NZ Dollar had weakened the outlook for inflation in the coming months and hence action was required. The Pound jumped from NZD 1.8700 to almost NZD 1.90 on the back of this news.
The ECB meet later on today with the obvious focus to be on Brexit. This is the first meeting since the UK voted to leave the EU and whilst the UK was never part of the Eurozone, all of its users will be impacted by the UK's decision. The Eurozone interest rate is likely to remain unchanged but Mario Draghi could hint at the ways his central bank will respond should the UK’s decision to break away from Brussels threaten the Eurozone’s faltering economic recovery. Draghi’s statement and press conference may include clues as to whether the ECB will downgrade expectations for growth and inflation. The larger the downgrades, the higher the chances that policymakers will unleash more monetary stimulus in the autumn.
In the US the expectation of an interest rate hike towards the end of this year is picking up again. Hopes of a rate hike had been put on the back burner after the UK voted to leave the EU but it appears that, as market anxieties are receding, monetary tightening expectations have picked up again.
Data wise, the day ahead brings June's UK retail sales figures which are expected to be down a little as the poor weather and imminent Brexit vote weighed on high street spending. The July data will be more interesting; a rise in temperatures and the result of the Brexit referendum will be entirely factored in at that point.
This afternoon brings the US Philly Fed manufacturing index which is expected to be positive for the US Dollar. They will also publish some housing data which is unlikely to move the market.
And Theresa May is meeting leaders in France today to continue her discussions over Britain's plans to leave the EU. There are serious disagreements between France and Germany on the plans for the future and the rise of the euro-sceptics in French politics is very evident. I suspect she will be heard saying "Il est pas vous , il nous est", and "Nous avons juste besoin de temps pour nous trouver".
Mooring help
A terrible boat skipper was going back and forth through the marina, searching for a place to dock before dark. Looking up to heaven he said, "Lord take pity on me. If you find me a good spot, I will donate to charity, give up the demon rum, treat women with respect, pay my taxes, and never again give my crew all of the blame and none of the glory!"
Miraculously, the boat with the best spot in the marina began pulling away to leave. The skipper looked up again and said, "Cancel that, I found one myself."

FX Research by David Johnson

Daily Currency Analysis with Charlie Horsley

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