Price action in the currency markets has been subdued in the past 24 hours in contrast to the sell-off in Asian equities, with the Dollar unable to build on its post labour market data release gain on Friday. US hourly wage growth hit a 9-year high of 2.9% yoy in July, in contrast to still modest wage growth in the Eurozone, Australia and in particular the UK. A 25bp Federal Reserve rate hike later this month looks like a done-deal while a December rate hike is looking increasingly likely, with markets now pricing 45bp of hikes for the remainder of the year
GBP/USD has treaded water around 1.2950 since Thursday. UK macro data out today have been mixed, with UK industrial output growth slowing to 0.1% mom in July from 0.4% mom in June but the trade deficit was a slightly smaller-than-expected £10bn. Markets are on the whole seemingly ignoring Brexit-related headlines, including reports that the EU is ready to give EU chief negotiator Barnier a mandate to close a Brexit deal ahead of an informal EU leaders’ meeting in Austria on 19-20. Whether or not the UK and EU can reach a deal in next two months would still not answer the question of whether the British parliament would vote in favour of a deal which has so far received little political or public backing at home.
EUR/USD is near the bottom of a three-week range, partly as a result of soft Eurozone macro data out last week. Eurozone GDP growth in Q2 was revised down to 2.1% yoy from 2.2% yoy and German industrial output and exports contracted in July compared to market expectations of small gains. Markets are likely to remain posed until the ECB’s policy meeting on Thursday with the ECB is unlikely to make sizeable changes to its policy stance and stick to its plan of starting to shrink its bond purchase of October. However, markets will be looking for signs that the threat of more US-China import tariffs, emerging market stress and concerns about the Italian budget are weighing on the Eurozone’s economic prospect and in turn its interest rate path.
