The Bank of England granted some reprieve

As we pointed out earlier in the week, June saw more manageable energy prices and a somewhat stronger sterling. As such, costs facing businesses have eased over the past month or so and that was reflected in yesterday’s inflation numbers, where the annual rate fell to 2.6%, the first fall since April 2016 and the sharpest decline since February 2015. What became increasingly clear to markets yesterday was that it’s going to be very difficult for the Bank of England to justify a rate rise in this disinflationary environment, and the pound quickly corrected lower to support this hypothesis. How long this dip lower in the pound will last is anybody’s guess but inflation paths are rarely one-directional and just because June’s figure dipped lower doesn’t mean we won’t see 3% inflation by December.

So, while the pressure on the consumer hasn’t increased further, as hedges expire and businesses continue to trickle through currency-based costs to customers, we expect inflation to remain high for the coming months and keep consumption subdued.

The resurgent euro

Given the data picture in the UK and the political news that comes, seemingly, daily from the US, this week’s strength in the euro has gone almost unnoticed, but it’s been one of the strongest performing currencies so far this week. The swift climb through 1.15 in EUR/USD has been sustained this morning, with the initial strength stemming from Trump’s faltering agenda after the failure of the landmark Trumpcare bill. But, these moves come ahead of tomorrow’s European Central Bank interest rate decision (which we’ll go through in detail in tomorrow’s Morning Update), which many believe will prove positive for the euro through more aggressive language from Draghi and the other members of the ECB. For euro traders, today’s session is light in data, but much focus will be paid to European government bonds, which have suffered of late, lifting bond yields and helping firm up interest in the currency, particularly ahead of tomorrow’s central bank meeting.

Brexit talks trip up on day two

Reports of the meeting in Brussels’ negotiation chamber make for tough reading; slow progress and disagreements, while inevitable, will be frustrating for both parties so early on in the process. With the UK’s exit bill first on the to-do list it was always going to be heated and it appears neither side are willing to give an inch, let alone a few billion euros. What appears to be particularly fraught in the discussions is the inclusion of the fee rebate won by Margaret Thatcher in 1984 – something that’s unlikely to go down well with the UK’s press. But, while it’s easy to get caught up in the machinations of the Brexit bill as one of the most important parts of the divorce, frankly, it isn’t. By the time Brexit is finalised, the UK will have sold close to £500 billion worth of goods and services to the continent – a far more significant prize.

The calendar today is particularly quiet for the UK, but the US sees the release of housing starts and building permits data.

Have a great day.