Article Highlights

  • U.K. CPI m/m: 0.2% as expected, same as previous
  • U.K. CPI y/y: 0.5% vs. 0.4% expected, 0.3% previous
  • U.K. core CPI y/y: 1.4% vs. 1.3% expected, 1.2% previous
  • U.K. PPI input m/m: 1.8% vs. 1.1% expected, 2.2% previous
  • U.K. PPI output m/m: 0.1% as expected, same as previous
  • U.K. RPI y/y: 1.6% vs. 1.4% expected and previous
  • U.K. HPI y/y: 8.1% vs. 7.9% expected, 8.1% previous
  • German ZEW economic sentiment: -6.8 vs. 9.0 expected, 19.2 previous
  • Euro Zone ZEW economic sentiment: -14.7 vs. 12.3 expected, 20.2 previous
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Brexit-related reports and updates were weighing down on the pound during the morning London session, while the risk-off mood likely drove safe-haven flows to the Greenback. The Kiwi, meanwhile, was marching higher to the beat of its own drummer.

Major Events/Reports:

U.K. CPI – U.K. June CPI increased by 0.2% month-on-month as expected, which is the same pace as last time, but increased by 0.5% year-on-year, which is better than the expected 0.4% reading and the previous 0.3% increase. The core reading, meanwhile, came in at 1.4%, which is better than the expected 1.3% increase and the previous 1.2% reading.

According to the CPI report, “Rises in air fares, prices for motor fuels and a variety of recreational and cultural goods and services were the main contributors to the increase in the rate,” but these were partially offset by “falls in the price of furniture and furnishings and accommodation services.”

Sentiment sours in the Euro Zone – The ZEW economic sentiment indicator for Germany came in at -6.8 in July, which is bad since it was expected to decrease yet remain in positive territory (9.0 expected, 19.2 previous).  The reading for the entire Euro Zone was even worse since it came in at -14.7 (12.3 expected, 20.2 previous).

Commentary from ZEW noted that “The Brexit vote has surprised the majority of financial market experts. Uncertainty about the vote’s consequences for the German economy is largely responsible for the substantial decline in economic sentiment. In particular, concerns about the export prospects and the stability of the European banking and financial system are likely to be a burden on the economic outlook.”

Hammond speaks – Philip Hammond, the U.K.’s new finance minister delivered a statement earlier, and some of the more important points he made were that the pro-Brexit vote was a shock to the system, given the U.K’s fiscal deficit. Also, budgetary measures may be needed, and such measures will be revealed by Autumn, although he stressed that the first move must be monetary.

Brexit process to be delayed?According to a report from Reuters, government lawyer Jason Coppell said that “The current position is that notification will not occur before the end of 2016.” The “notification” that Coppell mentioned refers to the act of invoking Article 50 of the TEU, which will start the formal process for an actual Brexit.

Risk aversion returns – Risk appetite was banished from European markets and risk aversion made a comeback, with the pan-European FTSEurofirst 300 down by 1.09% to 1,323.54, the blue-chip Euro Stoxx 50 down by 1.26% to 2,916.00, the U.K.’s FTSE 100 down by 0.36% to 6,671.00, and the DAX down by 1.19% to 9,943.00.

U.S. equity futures were also bleeding out, with the S&P 500m futures index down by 0.28% to 2,154.00 and Nasdaq futures index down by 0.23% to 4,597.88. As for gold, safe-haven flows allowed it to climb 0.27% higher to $1,332.95 per troy ounce.

Some market analysts attributed the return of risk aversion to “rally fatigue” and the earlier slide in oil prices, as well as the slump in the ZEW economic sentiment indicator.

Major Currency Movers:

GBP – The pound had a mixed performance at the start of the session, but got buoyed when the CPI readings mostly beat expectations, but began to slide lower across the board after talks about the actual Brexit process being delayed and the statement from Finance Minister Hammond that the first move to address the Brexit vote must be a monetary one, which likely reinforced expectations of a rate cut. Anyhow, the pound was the worst-performing currency of the morning London session.

GBP/USD was down by 73 pips (-0.56%) to 1.3138, GBP/AUD was down by 52 pips (-0.30%) to 1.7529, GBP/CAD was down by 30 pips (-0.18%) to 1.7125

NZD – There weren’t any direct catalysts and it was a risk-off session to boot, but Kiwi pairs were charging higher during the morning London session, ending up as the one currency to rule them all (during this session at least). It’s possible that we’re seeing some profit-taking by Kiwi shorts before the dairy auction ends.

NZD/USD was up by 15 pips (+0.22%) to 0.7037, NZD/CAD was up by 56 pips (+0.62%) to 0.9174, NZD/CHF was up by 33 pips (+0.49%) to 0.6936

USD – Forex traders usually flee to the Japanese yen when risk aversion prevails, but the threat of future stimulus may have made the yen less palatable, so forex traders flocked to the Greenback instead, allowing it to end up as the second-strongest currency of the session. It’s possible, however, that we’re seeing some preemptive positioning ahead of U.S. housing data for later.

USD/JPY was up by 25 pips (+0.24%) to 106.16, USD/CAD was up by 53 pips (+0.41%) to 1.3037, USD/CHF was up by 26 pips (+0.27%) to 0.9856

Watch Out For:

  • 12:30 pm GMT: U.S. building permits (1.15M expected, 1.14M previous)
  • 12:30 pm GMT: U.S. housing starts (1.17M expected, 1.16M previous)
  • 2:05 pm GMT: BOE Deputy Governor Ben Broadbent will testify before the Economic Affairs Committee
  • Dairy auction currently underway (-0.4% previous); auction usually ends at around 2:00 pm GMT

See also:

Asian Session Forex Recap

U.S. Session Forex Recap

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