Thursday AM: GBP - Consolidation Expected, EUR - Saved by ECB Chat, USD - Data Dump, Fed Minutes

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Pound: Gains to Fade, Focus on Friday's Brexit Intrigue

Sterling has enjoyed a decent week so far, recouping losses against the Dollar and Euro, thanks largely to the better-than-forecast outcome in the PMI data series which confirms the economy is growing at a decent pace.

Markets are betting that an August interest rate rise at the Bank of England is a a possibility, but don't expect the gains to extend on this story. Markets will wait to see the tone of the official data, out next week, before firming bets on August.

Another reason to expect Sterling to pare gains is the Brexit intrigue lined up for Friday.  

"The Pound is the currency to watch for the rest of this week as the UK government meets on Friday to decide on its final economic plan for Brexit. This includes tinderbox topics such as the UK’s single market access and Customs Union membership after Brexit in March 2019," says Kathleen Brooks, an analyst with Capital Index.

Those members of the Conservative party who want a pure Brexit and indisputable break from Brussels warns the party will not be forgiven by voters if it betrays the true spirit of Brexit. The prospect of a the triggering of a leadership challenge on PM May cannot be ruled out early next week if it is deemed that the PM is going soft-Brexit.

This would pose substantial risks to Sterling. "Any bounce post the meeting on Friday could be short-lived. If Theresa May openly defies the Brexiteers they may do her in once and for all, and a leadership contest in this environment could be one of the most pound-negative events so far this year," says Brooks.

But, there are some positives to be had in this too as "a softer Brexit stance may assuage market concerns, particularly the Brexit-sensitive Pound," says Brooks.

Indeed, we have reported this week that GBP/EUR could go towards 1.27 and GBP/USD to 1.40 on a soft Brexit. 

Euro Pares Losses on ECB Chatter

The Euro pared back mid-week losses against the Dollar and British Pound late in the session on news that some European Central Bank policy makers are uneasy about expectations that the policy interest rate will not increase until December 2019.

ECB policy makers are uneasy that investors are betting on a rate hike as late as December 2019, with a move in September or October next year a live possibility.

Market pricing shifted in response to the report: a 10bp hike in the deposit rate is 80% priced in for September 2019, compared with 70% prior.  

"With the ECB looking to wind down bond purchases, forward guidance is likely to become increasingly important, and the report overnight contrasts recent dovish rhetoric. Ultimately, the data flow will determine when the ECB eventually lifts rates and the end of 2019 is some time away. We suspect that the ECB will want to keep its options open and that more dovish comments may follow," says a note from ANZ Research over the matter.

Meanwhile, the outlook for the Euro improved somewhat with the second reading of the June composite Eurozone PMI confirming a rise to 54.9, ending a run of four consecutive monthly declines from a high of 58.8 in January.

Underlying the increase, new orders and employment indices both rose, but expectations of future activity continued to slide with the future output index at 63.4, compared with a high of 68.0 in January.

"Going forward, the key focus for euro area activity is the trade climate and how that will evolve in coming months. US President Trump has invited EU Commission President Juncker to Washington for trade talks, but no date has been set yet," says a note from ANZ Research.

US Dollar: Data, Fed Minutes

Data is on tap out of the US today following the mid-week hiatus owing to the July 4 holidays, and any beat could well see the currency maintain its period of dominance.

ADP private-sector hiring is out at 13:15 B.S.T and is expected to show an increase of 190k in June, up from 178k in May.

"This is well in-line with the average increase from the last seven years, and indicates a still strong hiring pace given the already tight labour market," says a note on the matter from Marit Øwre-Johnsen at DNB Bank ASA.

The ISM-non manufacturing index out at 15:00 B.S.T is expected to edge down slightly to 58.3 in June, after a sharp rebound to 58.6 in May.

The index still remains well above its historical average, and points to strong activity in Q2.

Minutes from the June 12-13 FOMC Meeting will be released at 19:00 B.S.T. and markets will be eyeing guidance on the pace of interest rate rises at the Federal Reserve over coming months.

Markets will be expecting an optimistic tone on-balance, in line with the upbeat economic
outlook from the policy statement.

"The June FOMC Minutes are likely to reflect the "great" economic outlook summarized by Chair Powell during his press conference, and thus have an on-net optimistic tone. Trade disputes, in particular, should be relegated to a potential risk to the overall positive outlook, overwhelmed by the fiscal boost. Watch for debate ‎on inflation overshooting and hiking past neutral," says a note from TD Securities ahead of the event.

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