Good morning,

Pressure on sterling increases

Sterling spent another afternoon session under the pump yesterday, getting close to ‘flash crash Friday’ lows with little catalyst for such a fall. Comments by Chancellor Hammond were blamed, then Mark Carney and even Heathrow were held up as reasons why the pound should be sinking.

They were all incorrect. Hammond, nor Carney, nor Heathrow were the Spartacus figure for sterling declines yesterday; a bored market with an easy target ahead of a Carney testimony was.

There are concerns over QE. There are concerns over what will happen with inflation. There are concerns over whether Mark Carney will serve a full 8 year term as Governor of the Bank of England. Ram these together with the now age-old concerns over trade agreement changes, and fears of investment and it is difficult to see why people wouldn’t be selling sterling.

Carney picks up the pound but politics aren’t going away

Carney’s testimony in front of a House of Lords Committee held few surprises but hints from him that there are limits to the Monetary Policy Committee’s ability to ‘look through’ inflation, that they were not ‘indifferent’ to its decline and that he will stay on an additional 3 years in his role allowed sterling to recover from its nosedive. For my money I think Carney stays in the role until 2020/2021 but the GBP sell-off should he quit will be a sight to see; the only ‘adult’ on June 24th jumping ship would only increase pressure on the pound.

The key thing in all of this is that while sterling recovered, it did not recover to the levels that it was making in the morning session; traders want this lower and will pile on to get it. Who’s to say that they don’t try the same thing before MPs on the European Scrutiny Committee grill Liam Fox this afternoon on what could be the fall out for the UK’s negotiations and plans from the Wallonia rejection of the Canadian CETA deal.

We also expect Theresa May will be tagged at PMQs this afternoon following a video emerging of her privately warning that companies would leave the UK if the country voted for Brexit during a secret audience with Goldman Sachs a month or so before the EU referendum vote.

AUD bounces on inflation

Overnight the G10 space has been rather quiet with only the AUD making the running following the latest inflation report. Inflation rose to 0.7%, higher than the 0.5% that most expected but roundly due to temporary factors such as flooding and electricity supply issues. Expectations of a Reserve Bank of Australia rate hike have withered overnight as a result and has sent AUDUSD and GBPAUD to fresh highs and lows as a result.

The Day Ahead

Elsewhere today we are still waiting on some ‘Tier 1’ events in the coming sessions – UK, US, French and German GDP measures – but for today we expect that the markets will be focused Canada’s Prime Minister signing off the end of the free trade deal with the EU parliament as well as UK mortgage lending data, German consumer confidence and inventory data from the US.

Have a great day.

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