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No speech from Boris leaves Pound higher against dollar; down vs Euro

Today’s macro highlights:

  • GBP - Weekly Earnings (May)
  • GBP - Unemployment (May)
  • USD - Industrial Production (June)

No speech from Boris leaves Pound higher against dollar; down vs Euro

Reports that we would see a resignation speech from Boris Johnson yesterday proved incorrect - that may come in Prime Minister’s Questions tomorrow - but the political agenda remained front of mind with Theresa May’s government being forced to make fresh concessions to Brexiteers in the latest reading of the Customs Bill. This news resulted in some weakness for the Pound, although downside pressures were limited and the focus once again appears to be on whether another referendum will be the only option. The PM may have attempted to stamp out that idea yesterday, but with a growing number of factions in Parliament warming to such an initiative, this would be far easier to deliver than a full-blown general election which requires a two thirds majority. It would bring a fresh layer of uncertainty, meaning it is almost inevitable that there will be further weakness for the Pound in the short term. This also has the potential to provide a meaningful solution to the dilemma which elected representatives seem unable to crack.

In terms of data yesterday, US advance retail sales came in as expected so this provided no fresh direction for the dollar, although today’s industrial production reading will presumably attract some fresh attention. That reading is due at 2.15pm BST and a rebound is expected from May’s negative figure. Assuming we do see that, the idea that Trump’s trade tariffs are dragging on the economy will be knocked to the side and may well help the dollar recover some of its recent broad-based losses.

Closer to home we have the latest unemployment and - perhaps more critically - wage growth data at 9.30am BST. Since the credit crisis of a decade ago, inflation has been outstripping increases in pay packets and this has been a key reason why the Bank of England has been unable to increase interest rates. However, that pattern has been broken in recent months and is adding weight to the idea that the MPC may push through a quarter point hike at the August meeting. A notable uptick in wage inflation today would once again push the probability of a hike in just over two weeks’ time, in turn providing a little more support for Sterling - at least in the short term. 

The pair managed to wrestle out a second consecutive day of gains yesterday and upbeat wage inflation data today could extend that run further. Gains will be overshadowed however by the political risk that is simmering away and any move towards a leadership challenge or indeed a second referendum could see a notable sell-off.

Limited economic data yesterday made for a relatively quiet session, although the Euro maintained the upper hand. The new Fed chair delivers his first semi-annual testimony to the Senate later today, but in light of the Reserve Bank’s recent comments, it’s difficult to see the outlook for 2018 being any more hawkish.

Rangebound trading continues for the cross, with yesterday’s government concessions reversing the gains seen off the back of Trump’s endorsement of a UK-US trade deal. With the prospect of a UK rate hike failing to garner support, markets clearly remain focused on the outcome of any Brexit deal.

Did you know…
The phrases ‘currency pair’ and ‘currency cross’ are used interchangeably in the market, but that’s not strictly correct.

The US Dollar makes up the central axis of all currency valuations so a currency’s rate against the greenback is a pair. i.e. GBP/USD or USD/JPY.

When you want to trade two currencies where one of them isn’t the US dollar - say NZD/JPY - you’re looking at a cross currency pair - more typically just known as a cross. The rate is calculated by referencing (crossing) the USD/JPY and USD/NZD prices.