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Sterling gathers momentum as a trade war is averted (for now)

Today’s macro highlights:

  • EUR – European Central Bank rate decision
  • USD – Durable goods orders (June)

Sterling gathers momentum as a trade war is averted (for now)

With few noteworthy economic releases to drive the currency, the Pound continued to gain on the back of Tuesday’s rally when markets showed their relief at Theresa May’s commitment to leading the Brexit charge. The only economic release really worth mentioning was news that the total number of mortgage approvals rose to its highest level in nine months as homeowners remortgage ahead of next week’s BoE meeting. The currency market also has a close eye on the meeting; investors appear to be adopting a wait-and-see approach before next week’s conference, where consensus expects a 25bps hike to take rates to 0.75%.

Meanwhile, news that Trump and Juncker have agreed to suspend new tariffs and keep the dialogue over trade going, helped ease concerns about the imminence of a full-blown trade war (for now). This was good news for the Euro, while the Dollar index (DXY) fell to a two-week low.

The second half of the week is busier in terms of economic data, with the European Central Bank’s monetary policy meeting scheduled for 12.45pm BST. There has been much speculation about what ECB President Mario Draghi meant by keeping rates on hold “through the summer” of 2019. Economic data out of Europe has been good, and hasn’t provided a particularly supportive backdrop for ongoing low rates. Any hint of an indication from Thursday’s meeting as to the possible timing of the next rate rise will likely provide the Euro with some short-term direction.

Across the Atlantic, June’s durable goods orders figures are due for release at 1.30pm BST while advance Q2 GDP numbers await us on Friday at the same time. The former is a closely watched indicator that feeds into GDP calculations so would usually give us a good idea of what to expect tomorrow. However, this time the Trump administration has leaked the data already, indicating a growth rate of 4.8% for the quarter, a number bolstered by tax cuts and considerably higher than consensus expectations of 2.5%. If the figures come in closer to original expectations, the market is likely to be disappointed which will weigh on the Dollar. However, if that leaked figures turn out to be accurate, we will probably see a rise in the Dollar as the market may interpret this as a signal that rates could need to rise faster than currently expected. 

The pair drew strength from yesterday’s bounce to hit fresh one-week highs during the early part of trade, only to behave more cautiously ahead of the Trump-Juncker meeting amid widespread risk aversion. As the UK parliament breaks for the summer, volumes could ebb away and this has the potential to exaggerate Brexit-induced volatility for the Pound. However, if the data remains robust, GBP may find further support, particularly if those Brexit concerns do ease.

News of an agreement between Trump and Juncker to avoid an out-and-out trade war boosted the common currency later in the session, breaking Tuesday’s high. Today’s ECB meeting is the most likely event to drive the pair in the short term; there is no other significant European data due for release.

With both currencies gaining on the day, the pair remains stuck in the range that has characterised their movement for the last few weeks. Support is likely to materialise in the form of a further easing of Brexit concerns and expectations of a UK rate hike next week.

Did you know…
The British Pound is sometimes referred to as “Pound Sterling”, or even just “Sterling”. There’s a lot of debate as to where this name came from, but one plausible theory is that it relates to a Saxon coin which was known as a sterling or a silver penny. 240 of these coins totalled a pound in weight, which was a veritable fortune back in the 8th century. Other suggestions are that the name is derived from the patterns minted on early coinage, often stars or starlings, whilst the Hanseatic League may have also played a role. 11th century Baltic Merchants - known as Easterlings - were granted protected status in the UK and their currency was seen as a better store of value. Traders would therefore ask to be paid in pounds of the Easterling, which some suggest was contracted to give us “Pounds Sterling”.