Global Themes

Can World Cup impact UK rate hike? 
- Sterling rebounds, eyes on World Cup
- Brexit 80% done? Euro unaffected
- Tariffs and Trump in headlines again
- BOC expected to raise rates


Sterling rebounds, eyes on World Cup
Prolonged political turmoil continued within Prime Minister Theresa May’s government this week, testing the British Pound’s resilience which is clutching on to the €1.13 handle against the Euro and drifting around the mid-$1.32 region against the US Dollar. Ms May attempted to reassert her authority at a cabinet meeting yesterday following the resignation of two top cabinet members earlier in the week which rocked the government and punished the pound. Environment secretary Michael Gove denied he would be resigning next.  A potential resignation could have been the catalyst to trigger a no confidence vote against PM May. Sterling shuffled higher as the chances of a leadership contest faded during the day and market participants switched focus towards the soft Brexit approach of the PM’s proposal.

The cabinet meeting also revealed that the Brexit White Paper will in fact be published on Thursday, ready for the European Union (EU) to scrutinise. There are about 14 weeks before the European council summit deadline on October 18th, where the EU has confirmed a deal needs to be reached. The vulnerability of Sterling is still very much apparent, and the risk of the EU rejecting this Brexit deal could cause some heavy GBP selling.

Bank of England Governor Mark Carney is scheduled to speak today at 4:30pm at a press conference on the Global Financial Crisis. Economic data did little to inspire further pound gains yesterday, with the estimate for GDP in May meeting forecasts of 0.3% m/m. However, Mr Carney has suggested that if England win the World Cup, the UK economy will get a huge boost and may support the need for higher interest rates, which could lift the pound.


Brexit 80% done? Euro unaffected
European Chief Negotiator Michel Barnier said yesterday that the Brexit deal is 80% agreed and suggested the full agreement can be wrapped up soon (source: Reuters). This is a very different message from EU, which has previously urged the UK to speed up talks, frustrated over the lack of progress since the transition deal was agreed in March. Despite the more positive tone, the Euro remained unfazed and oscillated around the €1.13 level against Sterling and $1.17 against the US Dollar.

The question remains, what is the further 20% to be agreed? It is most likely the Irish broader which has been a huge sticking point for both parties; Mr Barnier did state that he expects the remaining 20% to be agreed by October, which could put more pressure on talks leading up to the October EU summit.

Today, European Central Bank (ECB) President Mario Draghi will be speaking at an ECB statistics conference in Frankfurt. ECB member Peter Praet will also be speaking at the event and market participants will be looking for any signals from the two about the bank’s monetary policy.


Tariffs and Trump in headlines again
Trade tensions between the US and China increased again overnight as officials in the White House administration announced a further 10% in tariffs on $200 billion worth of goods from China. Beijing reacted angrily as it cannot respond directly in a tit for tat measure as this number exceeds the amount of goods it imports from the US, saying they would have to impose “qualitative measures” on US goods and companies (source: Reuters).

President Donald Trump has threatened on multiple occasions to hit China with further tariffs, and it will be interesting to see the reception he receives from world leaders at a NATO summit in Brussels today. The tariff announcement saw a sell-off in the Asian stock market overnight, and the dollar did benefit.

EUR/USD briefly fell below $1.17 before settling back at the lower end of the handle and the dollar broke above ¥111 against the safe-haven Japanese Yen to trade at the highest levels since May. Against another safe haven currency, USD/CHF hit a month high, though the dollar was unable to hold onto the gains. In a risk-off sentiment market, it is interesting that it is the dollar, rather than the Yen or the Swiss Franc that has benefited.


BOC expected to raise rates
The Bank of Canada (BOC) is widely expected to announce an interest rate increase from 1.25% to 1.5% at 3pm UK time today. There is a 96% probability of this happening according to Bloomberg, and the Canadian Dollar has been appreciating during July against its major peers. The CAD hit its weakest level against the USD in June in over 12 months above $1.33, but is now back at the lower end of the $1.31 handle. GBP/CAD has had some big swings over the past month, in June climbing above $1.77 before falling to the $1.73 handle – it’s now in the mid $1.74’s.

The CAD has also been benefiting from the increase in the price of oil and if the BOC does act as expected today it could make some further, albeit limited, gains. If the BOC disappoints and doesn’t act we could see a sell-off just as sharp as we saw in June. 

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