Good morning,

GBP: Hammering higher as markets look for real wage gains

It is rare that we lead with sterling these days given the lack of Brexit news in recent weeks but overnight trade has seen sterling run to its highest level since the EU referendum against the USD.

We have been calling for sterling to improve since the agreement and announcement of a transitional deal back in March and sentiment surveys focused at international businesses have shown that confidence is improving following the news that trading and customs conditions will remain as is until 2020.

Last night’s run higher seems to have been driven by bets that today’s wage numbers and tomorrow’s inflation reading will show that the difference in prices and take home pay is down to nothing, and that in turn will drive higher interest rates here in the UK. A rate rise in May is almost completely priced in as of this morning and attention will now shift to what happens at the Bank’s meeting in November.

The jobs and wage numbers are due at 09.30 and should show that employment conditions continue to improve.

USD: Do trade wars mean currency wars?

Its losses against the pound apart, the USD should be in a better place than it is at the moment. Donald Trump was active on Twitter last night calling out China and Russia for ‘currency devaluation’. The USD is weaker against the CNY year to date and while the RUB has come in for a tough couple of sessions in recent weeks this is a by-product of issues elsewhere.

Trump’s tweet does ask an important question though: will the climate of trade wars and antagonistic foreign policy lead to a ‘currency war’? We think not with China unlikely to sell its US debt holdings or devalue its currency given the issues it had with outflows following the 2015 devaluation.

CNH/CNY: GDP beats as sales improve

Chinese GDP overnight beat estimates by a nose coming in at 6.8% in Q1 of this year; a slight slip in manufacturing growth was more than made up by stronger retail sales. This is an encouraging trend as it hints that the ‘Old China’ is giving way to the ‘New China’ at a faster rate.

AUD: Cut hints hurt AUD

The largest faller on the session has been the AUD following the latest minutes from the Reserve Bank of Australia. A new line from the rate setting committee that “members agreed that it was more likely that the next move in the cash rate would be up, rather than down” sent the AUD lower. This may seem backwards but there had never really been any hint that rates would go lower so to even acknowledge that interest rates may go lower has given Aussie bulls a chill as Tuesday trade opened up.

Have a great day.

Jeremy Cook, Chief Economist