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US and North Korea summit passes without event; markets brace for busy day of data & politics ahead

Today’s macro highlights:

  • GBP - Weekly earnings (April)
  • GBP - Unemployment (May)
  • EUR - ZEW Economic Sentiment (June)
  • USD - CPI Inflation (May)

US and North Korea summit passes without event; markets brace for busy day of data & politics ahead

We saw Sterling shaken as a result of underwhelming production data yesterday morning, whilst the NIESR GDP reading also came in below expectations, but downside pressure was ultimately limited. GBP traders clearly focused on the bigger geopolitical events of today. The summit in Singapore between Trump and Kim is winding up as we write - progress has apparently been made, but what this looks like in reality remains to be seen. Critically however there has been no escalation in tensions, something which would have likely resulted in a risk-off shift into the dollar as a safe haven.

The day ahead is packed with macroeconomic news so volatility should be expected, but the Pound is likely to take additional direction from the 12 hours or so of debating that will take place in Parliament today over amendment to the Brexit bill. It could be a volatile period as markets respond to progress, but to recap, it’s not the granularity of each amendment that really matters here, but the signals we see in support of the Prime Minister. Anything that raises questions over the future viability of Theresa May’s leadership could result in a sharp sell-off for Sterling crosses, on the simple basis that markets will not appreciate the accompanying uncertainty over who may replace her.

At 9.30am BST we have a number of key readings from the UK, including unemployment and wage growth. With a lack of consensus still prevailing as to whether the Bank of England will look to hike interest rates at the August meeting, these numbers could provide some invaluable insight. Anything that points towards mounting inflationary pressures will have the potential to force the bank into tightening monetary policy soon.

10am BST sees the influential ZEW readings from the Eurozone and critically there’s a big dip expected in the German survey expectations. The Euro has been gaining ground in recent days, buoyed by speculation that this week’s ECB meeting will see a timetable laid out which will conclude the bank’s QE bond buying. However, any big shortfall over the outlook from the Eurozone’s economic powerhouse could certainly cause a rethink here. The deteriorating narrative between the EU and US over trade is also going to be front of mind - the ECB might not end up being as hawkish as some expect.

With US inflation data also on the slate for 1.30pm BST, we have yet more potentially market moving news to contend with. There’s a very high level of conviction that we’ll see another FOMC rate hike this week, but the bigger debate is whether there’s another one or two increases coming before the year end. If inflation starts to ebb away, that could point towards a more dovish outlook from the central bank and again lead to some dollar weakness.

The Federal Reserve’s outlook is unlikely to become any more hawkish than it already is, suggesting it’s the Pound that’s in the driving seat. Mounting inflationary pressures and Theresa May surviving today’s Brexit amendment votes largely unscathed would likely end up as a supportive combination for GBP/USD as it wallows close to recent lows.

The pair is still struggling to break higher although any clarity over how the ECB will act tomorrow could be decisive here. A big shortfall in today’s ZEW readings would certainly have the potential to rock sentiment and push the pair lower, as the repercussions of the G7 trade spat also need to be taken into consideration.

There’s a definite theme of weakness being illustrated with the pair, but anything that reassures the market over the UK political situation could be sufficient to reverse the current trend and see a return to the late May highs.