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The Pound and Euro rose early on Friday and the US Dollar fell as traders responded to the latest developments on migration in Brussels and international trade from Washington at the same time as positioning for an action-packed final session of the week in terms of economic data.
GBP – EU Summit, Current Account and GDP Data in Focus
The Pound rose against its US rival Friday, creeping higher in the slipstream of a resurgent Euro that has been buoyed by a surprise but vague agreement in Brussels on management of the migration crisis, but its broader trajectory on Friday will be determined by the latest current account and GDP data due at 09:30 London time.
Markets are looking for a UK current account deficit of £18 billion for the first-quarter, down from £18.4 billion in the final three months of 2017, while economists forecast the final estimate of first-quarter gross domestic product to emerge unchanged from the last at just 0.1%.
The current account deficit, once described as Britain’s achilles heel, describes the balance between the UK’s liabilities with the rest of the world and vice versa. It is an important measure of real world demand for the British currency as it tracks the difference between funds flowing into and out of the United Kingdom, while providing insight into the extent of the nation’s dependence on financing from overseas.
“The main issue yesterday was the argument about a joint immigration policy not Brexit, although that is going to be discussed today. As the British government has not found a solution on the question of the “Irish border” anyway there is not a lot to talk about today anyway,” says Antje Praefcke, an analyst at Commerzbank.
Friday’s data will help set the tone toward the UK economy ahead of the new month but the European Council summit will also feature on the market’s radar as the final day of the meeting will see national leaders address and absence of progress in the Brexit negotiations.
“Somehow the phrase “no deal” seems to be creeping in much more frequently in the news flow. The market at least no longer believes in a solution today so that Sterling came under pressure yesterday already. The reaction illustrates that there is still considerable potential for disappointment and thus depreciation in Sterling,” Praefcke adds.
Euro – Migration Deal and June Inflation Figures in Focus
The Euro rose sharply Friday after national leaders from across the EU reached a surprise, albeit vague, agreement on the management of migrant flows into Europe.
Migration has been a hot button issue for the Euro this week as stability of the German government and survival of Chancellor Angela Merkel. Merkel’s coalition partner, a Bavarian conservative party, had demanded a series of contentious measures of Merkel’s Christian Democratic Union under threat of closing its border with Austria and withdrawing support for the coalition.
At the heart of the dispute was a plan in Bavaria to send new migrants arriving at the border back to other European countries in which they had first registered their asylum claims. This threatened to see more migrants kept in Italy, a main landing stage for boats arriving from Libya, and to stoke further hostilities between the EU and Italian government. The League side of the Italian coalition was elected in March on an anti-migration ticket.
Fears were that without some kind of commitment from European leaders to resolving the issue, Bavaria’s conservatives will have pulled their support for Merkel ahead of a local election in four months time, leading to a collapse of the German government.
June inflation figures will garner the rest of the market’s attention Friday. Economists are looking for headline consumer price inflation to have risen from 1.9% in May to 2% in June. Although the more important “core” measure of consumer price growth, which removes volatile commodity items such as energy from the goods basket, is forecast to fall 10 basis points to 1%.
“Base effects from energy prices should help to support the headline print, sending it to its highest level since February 2017, but in line with the ECB’s forecasts from the June meeting. The EU Leaders’ Summit wraps up today, and Brexit will be on the agenda. As trailed in a draft about a week ago, EU27 leaders are expected to warn that progress is not being made quickly enough on the Brexit front,” says Jacqui Douglas, chief European macro strategist at TD Securities.
US Dollar – Easing Lower as Trump Trade Fears Cool
The US Dollar fell broadly on Friday but rose against the Japanese Yen, a classic sign that financial market tensions are now easing, which suggests support for risk assets during the session.
Previously markets had been on edge over an expected escalation in the so called trade war between the US and China. President Donald Trump was expected to unveil a series of new measures designed to combat alleged Chinese intellectual property theft but a Thursday speech given at the White House suggested Trump will now allow Congress time to draft legislation on the subject rather than firing from the hip with new executive sanctions.
“The Trump administration seemed to retreat from a full scale trade war with China. Yet, the Director of the National Economic Council under the US President Trump Larry Kudlow stated afterwards that Trump was not getting any softer on China,” says Vladimir Miklashevsky, a strategist at Danske Bank.
With trade fears now on the back burner the US Dollar will be driven by global factors and, to an extent, the latest PCE inflation data due during the noon session.
“Based on CPI, we expect PCE to rise +0.2% m/m, which translates into 1.9% y/y, up from 1.8%. We still believe there are upside risks to US inflation, which underpins our view of a total of four rate hikes being more likely,” Miklashevsky says.
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