Brexit and Dollar strength weigh on Sterling; Turkey concerns linger

Today’s macro highlights:

  • GBP – UK CPI (July)
  • USD – Advance retail sales (July)

Brexit and Dollar strength weigh on Sterling; Turkey concerns linger

Some calm returned to markets on Tuesday as the Lira stabilised following the central bank’s liquidity provisions. This allowed the major currencies to be influenced by economic fundamentals rather than the Turkish crisis. The Euro gained on the back of this improved backdrop, with better-than-expected German GDP and ZEW survey figures helpful; a slightly faster second print of Eurozone GDP (compared to the first print), provided further impetus. However, dollar strength served to offset these gains such that the Euro ended the day weaker against the Greenback. The Dollar continues to benefit from a variety of supportive factors, including a hawkish central bank and its status as a safe haven in times of stress. 

In the UK, the Pound initially found support from a decline in the unemployment rate to its lowest level since 1975. However, weekly average earnings and the employment change both disappointed, paring the Pound’s gains somewhat. Rhetoric from British foreign minister Jeremy Hunt about the need to be prepared for “the possibility of a chaotic no-deal Brexit” weighed further on the currency.

Looking ahead, the day is due to deliver consumer inflation figures in the UK (09.30 BST). It is widely expected that the former will accelerate slightly on a year-on-year basis, with monthly core inflation staying steady compared to the previous month. If, however, these predictions are incorrect and inflation slows, the Pound will almost certainly see some selling pressure. This outcome will exacerbate existing fears from some investors that the Bank of England hiked rates too soon (particularly after the disappointing wage growth released yesterday). Of course, better-than-expected inflation will allay these fears and set the Pound on track for some mid-week strength.

In the US, the advance reading of retail sales is due out at 13.30 BST. Consensus expects to see a marginal rise in month-on-month sales with the core reading accelerating slightly faster.

GBP/USD

Yesterday’s labour market reports had a mixed effect on the pair, although overall the pair ended the day lower. Brexit talks resume on Thursday and are likely to be the main influence on cable. Other factors which could contribute to price movements include inflation (due out on today) and retail sales (scheduled for release tomorrow).

EUR/USD

EUR/USD was helped by an easing of Turkish tensions and upbeat German and Eurozone data, but this was outweighed by the ongoing strength of the Dollar such that the pair hit fresh thirteen-month lows. With no relevant economic data due out until Friday when inflation figures are scheduled for release, the pair is likely to be affected mainly by geopolitical risk over the next few days.

GBP/EUR

The Pound was stronger against the Euro than against the Dollar and the cross continued on its upward trend. Brexit negotiations and the Turkish crisis remain a heady mix of influences on the pair this week.