US Open Preview – Pound reverses gains on Irish border headlines despite stronger inflation; SNB rate decision pending

Christina Parthenidou, Melina Deltas, XM Investment Research Desk

Here are the latest developments in global markets:

  • FOREX: In the wake of upbeat UK inflation readings, sterling advanced considerably against the greenback to an 8-week high of 1.3214. The Consumer price index rose to an annual rate of 2.7% from 2.5% in the previous month and comfortably above market expectations of 2.4%. It was the highest inflation rate since February. On a monthly basis, the figure inched up by 0.7% versus 0.0% previously, while the annual core CPI ticked higher to 2.1% from 1.9% before. However, a few hours later, pound/dollar erased all its gains, falling back to 1.3140 (-0.11%) as sources stated that the UK Prime Minister may reject the Irish border proposal prepared by the EU Brexit negotiator Michel Barnier. Pound/yen also see-sawed, posting a new 2-month high of 148.52 (+0.19%) before dropping to 147.55 (-0.12%). Dollar/yen was trading flat around 112.32 after hitting a two-month high of 112.44 early today. In monetary policy-related news, the Bank of Japan left its policy unchanged today, keeping interest rates in negative territory. Euro/dollar failed to hold gains above 1.1700, slipping back to 1.1675 (+0.07%) ahead of the EU summit on Thursday. Euro/pound inched up by 0.15% to 0.8889. The aussie and the kiwi were the biggest gainers versus the US dollar, adding 0.40% and 0.30% to their performances respectively. Meanwhile, dollar/loonie was changing hands lower at 1.2955 (-0.12%) but slightly above the 3-week low of 1.2940 reached today as the White House economic adviser Kevin Hassett revealed that the US is ready to move ahead with a trade deal with Mexico without Canada.
  • STOCKS: European equities were mixed at 1200 GMT on Wednesday.  The pan-European STOXX 600 and the blue-chip Euro STOXX 50 rose by 0.08%. The German DAX 30 climbed by 0.23%, the French CAC 40 increased by 0.27%, while the Italian FTSE MIB declined by 0.31%. The British FTSE 100 improved by 0.33%. In Asia, the majority of stocks closed strongly positive, while futures tracking US indices such the S&P 500, Dow Jones and Nasdaq 100 area pointed to a softer negative open.
  • COMMODITIES: Oil prices were slightly weaker today but remained supported by fears of a supply constraint. WTI crude were down by 0.11% to $69.77/barrel and Brent lost 0.20% to trade at $78.87/barrel. In precious metals, gold prices climbed by 0.45%, surpassing $1,200/ounce.

Day ahead: New Zealand GDP growth eyed; Swiss National Bank to announce interest rates

Although China relieved markets by saying that a currency devaluation will not be used as a strategy to boost its exports following another exchange of tariffs with the US, the trade story will continue to drive investors sentiment. Late on Monday, the US President imposed a 10% tariff on $200 billion Chinese imports taking effect on September 24 as he promised. He also said that the tariff size will increase to 25% as of January 1, 2019. The attack by the US, though, did not scare China, with the nation retaliating with tariffs on $60 billion US imports, a well-anticipated move by Beijing. Questions now remain whether the sides will finally gather around the table to resolve their trade differences and if that ever occurs whether the talks will lead to a de-escalation of the prolonged trade dispute. While both countries showed an interest in engaging in a dialogue, headlines on Tuesday revealed that China is considering sending a lower-level representative to the US for the talks. If that is the case and the US reacts in the same way, negotiations might not produce much progress.

In terms of data releases, US building permits and housing starts for the month of August will come into focus later today at 1230 GMT, while US current account readings for the second quarter published at the same time could attract some interest as well.

Staying in the US, the Energy Information Administration will deliver its weekly report on US oil inventories for the week ending September 14 at 1430 GMT.

Meanwhile in New Zealand, eyes will turn to Q2 GDP growth figures at 2245 GMT, with analysts expecting a larger expansion of 0.7% quarter-on-quarter compared to a growth of 0.5% seen previously. However, on yearly basis forecasts are for growth to slow down to 2.5% from 2.7% in Q1. Should the numbers beat expectations, the kiwi which came under severe pressure early this month, dropping to 2 ½ -month lows versus the US dollar could increase positive momentum. On the other hand, a miss in data may activate bearish corrections.

On Wednesday at 0730 GMT, just before the European market open, the Swiss National Bank is scheduled to make an announcement on interest rates. Following their ECB counterparts, SNB policymakers are widely anticipated to keep borrowing costs unchanged at a record low of -0.75% for the 16th consecutive time. Despite the stronger economic growth, the SNB might consider it wiser to maintain stimulus as a rate hike would strengthen the Swiss franc currency even further, something policymakers want to avoid as this keeps inflation far below its 2.0% price target. Should policymakers stress that the franc’s appreciation stands a barrier to upside inflationary pressures, dollar/franc might post gains.

In contrast to SNB, in Norway, the Norges Bank is projected to pick up rates from 0.5% to 0.75% at 0800 GMT on Thursday. This will be the first rate hike since 2011.

As of today’s public speeches, the ECB chief Mario Draghi will be stepping to the rostrum at 1300 GMT. Comments by the BoE MPC member Silvana Tenreyro are expected later in the day as well.

Brexit updates will be of importance as the UK Prime Minister prepares to meet the EU leaders in an informal summit in Salzburg, Austria on Thursday.