Good morning,

USD: Korea keeps it weak

While there has been few new developments in the war of words between North Korea and the United States, markets remain focused on the arguments and its impact on asset prices. A run into haven assets – mainly the Japanese yen and the Swiss franc – alongside a selling off in equity markets has been how traders and speculators have decided to express their concern for now. A similar thread will be followed should the situation deteriorate further but it is not for us to say how it could get worse because that is rather obvious.

The Japanese yen is at an 8 week high versus the US dollar this morning with local emerging market currencies – PHP, KRW and IDR – all slipping against the USD. Within the G10, the AUD is the main casualty but with a decline of 0.3% the fallout – if you’ll excuse the pun – has been relatively little.

The main news of the day will be the latest reading of US inflation at 1.30pm. Such has been the shift in rhetoric from the Federal Reserve in the past few weeks, one could be forgiven in thinking that inflation was slowing in the US.

The pause in the program of US rate hikes has been as a result of inflation becoming a little less dependable in the past few months. Against a target of 2%, we expect this month’s number to hit 1.8%; not disappointing but still not good enough and the general uneasiness around what Fed members do at their meeting in December will continue until wages show us whether we can count on businesses to drive inflation higher.

GBP: trade not benefiting from weaker sterling

Despite the fall in the pound the UK’s trade deficit modestly widened in June, registering a deficit of £8.25 billion with the European Union and £4.47 billion outside of it. Since the EU referendum, exporters have benefited from the poor sterling exchange rate flattering their prices and boosting margins, but not so in June, where export volumes fell by close to 1%. Interestingly, exports to the continent rose by just shy of 3%, but fell on the overall measure, meaning the UK is becoming more, not less, dependent on the European Union, whatever the result of the referendum last year.

June’s UK industrial & manufacturing production numbers came in mixed, with all gains in industrial output pretty much countered by a flat month for manufacturing. Sterling’s reaction was, as such, limited and serves as a reminder that the rebalanced, diversified business community that politicians have been promising for decades is yet to materialise.

EUR: inflation already in trouble?

While the major news of the day will be the US inflation reading we have also seen France release its latest numbers this morning. The European Central Bank’s target is similar to the US’s at 2% however French inflation is only able to increase at 0.8% on the year and there are already concerns that the current strength of the EUR will start to cause issues for the European Central Bank in the coming months as it depresses already weak inflation pressures.

Have a great day and a better weekend

Jeremy Cook, Chief Economist