Daily Market Report,
Good morning all and happy hump day. Welcome to a lovely bright and sunny morning in London town.
A wise man once said “Darkness cannot drive out darkness, only light can do that. Hate cannot drive out hate, only love can do that”.
After spending the last couple of days consolidating around very tight ranges, cable (GBP/USD) came under a renewed selling pressure following the recent comments from UK Prime Minister Theresa May.
In the late North American session, Theresa May crossed the wires, stating that based on the latest investigation, the terror threat level in the U.K. has been raised to “critical,” suggesting the possibility of further attacks in near-term. She further added that armed military personnel has been deployed across the country to increase the security.
On the other hand, fueled by the Trump administration’s budget plan, the bullish sentiment surrounding the greenback allowed the US Dollar Index to make a strong rebound yesterday, reaching its daily high at 97.32. At the moment, the index is at 97.28, up 0.4% on the day. Furthermore, Philly Fed President Harker’s hawkish tone supported the greenback after he said that the Fed could go for two more rate hikes this year and the labor market has very little slack left.
GBP/EUR has been on the bid in a strong retracement taking up bullish flows in the euro vs the dollar in recent sessions. At the same time, the European economy is performing better and the ECB is tipped to taper their programmes in time to come. Merkel’s comments over the weakness of the euro is also a major pivotal point for the current status quo that had underpin euro strength.
Yesterday, the European growth continued at a solid pace according to Markit flash estimates, with regional PMIs advancing further in May. Growth in the services sector, however, was slightly below expected, but overall the composite figures came above expected. The German IFO survey showed that business confidence remains strong, with the index up to 114.6 from previous 113.0.
In respect to the pound, the terror attack in Manchester comes just two weeks before the scheduled snap election and was on the eve of when the public could register to vote in the UK. Coupled with the Westminster attack at Parliament in March, all this weighs on investor’s sentiment around the UK. PM May has suspended campaigning activities while the government aligns across the nations of the UK to deal with the latest atrocities here in the UK. Next Thursday the UK data will be under the microscope with Q1 GDP revisions.
From across the pond, EUR/USD has been consolidating the downside with a resurgence of the dollar. The question is how much further can the dollar rise in an environment that is supportive of a higher euro over the medium term. The answer lies in how long the markets will continue to respond to hawkish (positive) Fed speakers and political promises around fiscal spending to spur on the recovery in the US.
CME Group FedWatch’s June hike probability leaped above 80%.
EUR/USD is otherwise supported on improvements in the EU’s economy, a more stable political outlook and the possibility of the ECB tapering in time to come with a turn in rhetoric from the Central Bank. However, the euro has slipped from higher levels while Wall Street, for now, is able to relish in the prospects found from Trump’s budget plan for the fiscal year 2018.
Also, Philadelphia Fed’s President Patrick Harker was on the wires, via Reuters, repeating that he sees two more rate hikes this year. US Treasury Secretary Steve Mnuchin was saying yesterday that he is hopeful that the tax reform will be completed in 2017.
Statistics to watch out for today
From the Euro Zone at 1.45pm we have a speech from ECB President Mario Draghi. Event: Keynote speech by the President at First Conference on Financial Stability organised by Banco de España and Centro de Estudios Monetarios y Financieros in Madrid, Spain.
From the USA at 7pm we have the FOMC minutes from the 2nd & 3rd May 2017 meeting.
Have a great day all.