July 16, 2024

“Political developments in the US are sending ripples across financial markets ahead of the November election, but it’s the macroeconomic data that remains in charge for FX. On that front, Canadian CPI and US retail sales data will be crucial today, ahead of the UK CPI print tomorrow morning.”

Tim Hallinan – Trading Director

Main Headlines

Donald Trump entered the Republican National Convention to passionate applause yesterday, in his first public appearance since Saturday’s assassination attempt. The former president has officially been nominated as the Republican candidate and he announced that Ohio Senator JD Vance would be his running mate for the November election. The PredictIt online betting marketplace now puts Trump at a 68% chance of victory.

UK recruiters have signalled tougher hiring conditions, triggered by falling job switches, political uncertainties, and higher interest rates. That’s good news for the Bank of England, who have made significant progress in cooling an overheating labour market to bring down inflation.

GBP

Sterling is trading a touch below its one-year high against the dollar this morning, after briefly notching a two-year high versus the euro in yesterday’s session. The pound’s supportive factors – sticky services inflation, political stability, an economic rebound, and a weaker dollar – have held without any significant retracement so far this week. Markets brushed off a podcast appearance by the BoE’s perma-dove Swati Dhingra yesterday, who argued staunchly that the time to cut rates is now, given the lagged effect on the real economy. The real test is the final CPI print tomorrow morning ahead of the monetary policy meeting in two weeks’ time. The consensus is looking for inflation to undershoot the central bank target in June at 1.9%, but there is only one number that really matters: services inflation. Policymakers explained away much of the recent upside surprises at the June meeting, pinning them down to annual price adjustments – if they’re proven right tomorrow and it cools markedly from 5.7%, markets will become increasingly confident about an August cut, which currently sits at a 50/50.

EUR

A lack of domestic drivers has left the euro drifting higher over the past few weeks, but the calendar comes back to life today. The ZEW survey is the main event for this morning, and markets are looking for a cooling in investor sentiment. The sentiment index for the eurozone has surprised to the upside for nine consecutive times now, however, and a slight trim to German optimism is unlikely to fill policymakers with hope that the eurozone economy is still cooling down. After that, it will be the Thursday ECB decision on traders’ minds.

USD

For all the talk of Trump and the impact of politics on the dollar, any lift for the greenback has always been fleeting so far. The weakening macro story still dominates for the greenback, with a weakening labour market and a budding disinflationary trend keeping it close to its lowest levels since early June. Rather, the ‘Trump trade’ appears only to be supporting the dollar at the margin. The yield curve is steepening but short-term yields continue to fall after last week’s soft CPI print, undoubtedly encouraged yesterday by Powell’s increasingly dovish comments, when he remarked that ‘we’ve had three better readings, and if you average them, that’s a pretty good place’. Today, retail sales data is expected to provide further evidence of a flagging consumer, with the consensus looking for a 0.2% contraction in June. USD/CAD is likely to be a lively pair today as we get some CPI data in Canada, which is likely to be in a much better place after last month’s surprise surge that cast some doubt on a follow-up cut next week.

Markets

The ‘Trump trade’ was the main guide in cross-asset trading yesterday. It is beginning to show some recognisable characteristics: rallies in stocks, gold, and crypto, and a steepening of the Treasury yield curve as investors price in a more inflationary environment in the long term. The 1.6% rise in S&P 500 energy stocks is a great example of the impact of expectations for lower regulations and extended tax cuts. Earnings season continues with Goldman Sach jumping 2.6% yesterday, and Morgan Stanley, BofA, and Charles Schwab are among those releasing results today.

Main Economic Events (All Times CET)

11:00am: Eurozone ZEW Economic Sentiment
2:30pm: Canadian CPI Inflation
2:30pm: US Retail Sales
8:45pm: Fed’s Kugler speaks

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