Good morning,

GBP: All bark and no bite?

Sterling has rolled off the highs seen yesterday and Friday as the market splits into two definitive camps; those who believe a hike is coming from the Bank of England and those who don’t. The latter will have had their case emboldened a little by Mark Carney’s speech yesterday afternoon that seemed a little more circumspect than the meeting minutes released on Thursday.

Carney told the IMF and assorted journalists that while some BOE tightening may be needed in the coming months there are still considerable risks to the outlook and that the UK economy will underperform the average growth profile of other G7 nations until the middle of next year.

The most interesting comment however was that UK interest rates may have to “move in order to stand still” due to possibility that global equilibrium interest rates are rising. This could be for any number of reasons but from having sat in a currency seat for as many years as I have this seems to be an acknowledgement that a higher differential in interest rates between the UK and other trade partners will increase the chances that the pound is used as a funding currency for carry trades, further depressing GBP’s value and boosting inflation pressures.

There are no Bank of England members due to speak in the coming days and sterling will likely return to be being all about the data calendar which picks up tomorrow with the latest round of retail sales data.

USD: Fed up before the Fed

The Federal Reserve meeting is tomorrow but the dollar has begun its pre-meeting sell-off early, slipping in Asian trade overnight and bringing EURUSD back towards 1.20. There is another hike in the Federal Reserve this year we think but we are running out of time and data to be convinced that it could happen. Similarly markets are clamouring for details of the Fed’s proposed reduction of its balance sheet and any further delays will extend USD losses.

Noises from the Trump administration overnight about North Korea may have also had a part in weakening the dollar. US Secretary of Defence James Mattis said that “when the missiles — were they to be a threat, whether it be to U.S. territory, Guam, obviously Japan — Japan’s territory, that would elicit a different response from us”. Mattis also hinted at military options that might spare Seoul from a brutal counterattack according to an interview with Reuters.

CNY/CNH: Gaps as Trump trade negotiator comments on Chinese power

US Trade Representative Robert Lightizer told markets this morning that “there is one challenge on the current scene that is substantially more difficult than those faced in the past, and that is China. The sheer scale of their coordinated effort to develop their economy, to subsidize, to create national champions, to force technology transfers and to distort markets in China and throughout the world is a threat to the world trading system that is unprecedented.”

USDCNH has risen for the 3rd day in a row this morning with local demand for US dollars for end of quarter balance sheet operations by local corporates also likely to have an effect.

The Day Ahead

Today’s quiet data today features the latest ZEW survey of economist sentiment on the German economy at 10am which has the abilirty to boost the euro following yesterday’s 4 month high inflation reading.

Have a great day.