Global Themes

Brexit vote, Fed, ECB; the week ahead  
- A potentially monumental week for Sterling  
- No Trump support for the G-7
- Key ECB meeting on Thursday


A potentially monumental week for Sterling
It is a blockbuster week for the British Pound, which has the potential to shape the future politically, on Brexit and the potential for interest rates to rise this year.

On Tuesday, we have the release of wage data and on Wednesday is the release of inflation data. Both of these important economic indicators are key factors for the Bank of England (BOE) when deciding whether to raise interest rates or not. In the past, the lack of pace in wage growth has been a stumbling block for the BOE to raise rates, but last month’s data revealed wages are finally outstripping inflation, which could encourage the BOE to act later this year. GBP/USD is eying a run at $1.35 as the next upside hurdle, and €1.14 is still in sight against the Euro should the pound get a boost from upbeat data.

Average earnings excluding bonus, is forecast to have risen 2.9% in April, unchanged from the previous month. Inflation is expected at 2.4%, so therefore wages are expected to continue to beat inflation. Even if inflation is higher than expected, this could still be Sterling positive as market participants may still see raising rates as a way to get inflation to the BOE’s 2% target. A recent Reuters survey has a probability of a rate rise at around 50% for August, especially after comments from BOE Deputy Governor Dave Ramsden last week, which pointed to the Bank being ready to move forward.

There are crucial votes taking place in the House of Commons on Tuesday and Wednesday. MP’s will debate and vote on amendments made to the Brexit legislation by the House of Lords. The key piece will be if the government is defeated on the issue around whether the UK will continue to be part of the European Economic Area (EEA) after Brexit, which the Lords have pushed for. If MP’s do vote to keep this amendment, it could potentially be a boost for Sterling as it would point to a ‘soft’ Brexit. However, Prime Minister Theresa May is unlikely to survive such a defeat, and if a no confidence vote in her is made any gains to Sterling could be lost.

This morning see’s the release of manufacturing production data at 9:30am and on Thursday morning is the release of retail sales data..

G-7 Summit

No Trump support for the G-7
The G-7 summit ended with the President of the United States showing no support for his fellow nations when it comes to trade.

President Trump maintained his ‘America First’ stance on trade policy, despite all other countries agreeing on the need for ‘free, fair and mutually beneficial trade’ (source: Reuters). The US Dollar has moved little this morning, despite the global trade situation appearing more fragile. Mr Trump is now in Singapore where he is ready to sit with North Korean Premier Kim Jung-un tomorrow.

The current objective of the meet is aimed at finding a solution which would bring an end to the nuclear stand-off on the Korean Peninsula. The situation between the US and North Korea has been tense since the start of the year. Risk-off sentiment was seen when North Korea began testing missile launches claiming they could hit the east coast of the US. Should both parties reach an amicable decision the dollar could ascend with the risk-on sentiment hitting markets again.  This will be the first ever face-to-face meeting between the two leaders, so many market participants could hold off to see how things play out prior to the Federal Reserve (Fed) meeting this Wednesday.

US inflation data for May will be released on Tuesday and expected to show a rise in prices, which could prove influential ahead of the Fed meeting. Retails sales data for May is released on Thursday and is also forecast to have improved. 

ECB Meeting

Key ECB meeting on Thursday?
Following a healthy week of gains last week, the Euro continues to find upside traction this morning, retaking the $1.18 handle against the US Dollar and dragging GBP/EUR down further away from €1.14.

The common currency remains buoyed by the optimism that the European Central Bank (ECB) will provide forward guidance on when it plans to end its current stimulus programme. The ECB meeting scheduled this Thursday at 12:45pm will be followed by a press conference with Mario Draghi at 1:30pm. Comments made by a number of ECB policymakers last week, prompted speculative bets that the ECB could end its quantitative easing program by the end of this year and raise interest rates by June 2019.

It could be argued that the market has perhaps misinterpreted the comments, and this upswing in the Euro is an overreaction. Therefore if the meeting this week proves to be a non-event, we could witness a sharp market correction as a result with traders aggressively selling the Euro. On the contrary, if the ECB deliver a hawkish message this Thursday, the Euro is likely to continue climbing and EUR/USD could knock on the door of $1.19. Further Euro strength could also put continued negative pressure on GBP/EUR this week.

On the data front, the German ZEW economic index is released tomorrow at 10:00am. Eurozone industrial production is slated in for Wednesday, and final German and overall Eurozone inflation figures are released Thursday and Friday respectively. 

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