Global Themes

Dollar drives markets
- Yields and index boost USD
- Jobs data does little to support Sterling 
- Inflation number looks set to keep ECB status quo


Yields and index boost USD
The US Dollar hit its strongest level since December against the Euro as the pair touched $1.1816 during yesterday’s trading. It has opened today at the low end of the $1.18 handle, and the dollar seems to have found new support after looking like it had run out of steam. The dollar index hit 93.457, the highest level since December 22nd ,and the benchmark 10-year Treasury yield hit above 3% (source: Reuters).

USD/JPY as a result traded at a high of 110.45, the weakest the Yen has been against the dollar since the 2nd of February. GBP/USD traded back into the $1.34 handle for a period, hitting a 2018 low of $1.3449, before reclaiming $1.35, though it appears a tentative hold at the moment.

Retail sales data came in largely as forecasted, with growth of 0.3% for April m/m. The dollar was mainly buoyed by the March figure being upwardly revised to 0.8%. The figure for retail ex auto’s disappointed slightly, with growth at 0.3% m/m v’s a forecast of 0.5%, but was again revised up from the previous release from 0.2% to 0.4%. The moves suggest that the US economy is starting to see more spending power coming to fruition, after months of low unemployment data hinting at the possibility.


Jobs data does little to support Sterling
Earnings data excluding bonuses edged up to 2.9% y/y for a rolling 3-month period, from the previous 2.8% according to the Office for National Statistics.

Meanwhile, employment rose by 197,000 during the first 3 months of this year, the biggest jump since late 2015. Although positive, the rate of growth in earning including bonus was at 2.6% for the same period, which could concern the bank of England (BOE) (source: Reuters).

BOE Deputy Governor Ben Broadbent said in an interview with the Daily Telegraph that the bank will not 'spoon feed' markets on rate hikes, suggesting that the criticized policy of forward guidance maybe coming to an end. The British Pound found little support from the data release, coupled with the longer-term concerns over the BOE.

Prime Minister Theresa May will publish a detailed plan for the UK’s post-Brexit relationship with Europe next month, setting a deadline for her warring Cabinet to agree on a common stance. Further delays beyond the June 23rd – 24th EU Summit could see further downside pressure for the pound. European Union Chief Negotiator Michel Barnier warned at the start of this week that “no significant progress” had been made in talks since March (source: Guardian).


Inflation number looks set to keep ECB status quo
The Euro appears unlikely to get much support today from the important inflation release for the Eurozone.

The annualised CPI number for April is expected to be at 1.2%, well below the European Central Bank’s (ECB) target of 2%, seen as the critical level for removing stimulus measures. Core inflation is expected to rise to 0.2% m/m and increasing 0.7% y/y for April. German harmonised inflation data, already released this morning, remained unchanged at 1.4% y/y for April, and given how closely the overall EZ number and Germany tend to be, this should be a key indicator. GBP/EUR has already broken back above €1.14 for the first time since May the 10th.

ECB President Mario Draghi is speaking at lunchtime today at an event to mark Vice-President Vítor Constâncio finishing his term with the Bank. Although not expected to be discussing monetary policy, given that the inflation number is released prior to this, Mr Draghi will no doubt be asked about this by the press in attendance. Mr Constâncio is being replaced by Luis de Guindos from Spain.

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