Pressure on US dollar continues

OVERNIGHT

Asia-Pacific stock markets apart from Japan are mostly higher this morning as this week’s rally in financial assets continues. The Japanese market may have been impacted by speculation that the Bank of Japan is considering a tightening in monetary policy in response to higher-than-expected inflation.  

THE DAY AHEAD

Today looks like being a fairly quiet end to a busy week. There are no data releases of note in the UK and only the May international trade report for the Eurozone. The Eurozone’s trade deficit with the rest of the world initially widened sharply last year. However, since the autumn the deficit has narrowed and in March it recorded its first surplus since September 2021 although it did slip back into deficit in April. Movements in underlying export and import volumes may account for some of these fluctuations but given that the Eurozone is a net energy importer much of it will reflect last year’s rise in energy prices. So with energy prices now well down from the peaks the trade balance may continue on an improving trend.

Today’s July update for the University of Michigan  consumer sentiment survey will provide timely news on the feelings of US consumers. In June the measure jumped to its highest for four months as feelings regarding the present and future both improved. That was probably being driven primarily by growing signs that inflation is on the way down. Consequently, we expect another improvement this month alongside another fall in near-term inflation expectations even though the survey will have been conducted prior to the lower-than-expected June CPI inflation outturn.

Today’s calendar is also light on speeches from central bank officials. That includes the US Federal Reserve which after this weekend goes into its silent period ahead of its monetary policy update on 26th July. Despite this week’s softer inflation surprise, markets still think it’s likely that the Fed will hike interest rates by another 25 basis points but they are now even more sceptical about whether there will be any further increases in the autumn. The next few days will be Fed officials’ last opportunity to influence those expectations ahead of their policy meeting.  

Early Monday, China will release its first estimate of Q2 GDP along with June readings for industrial production and retail sales. The consensus expectation is that GDP growth will have slowed from Q1 reflecting a fading of the initial boost to activity from the relaxing of Covid restrictions. Moreover, the June data is expected to show that deceleration continuing through quarter end. 

MARKETS

US Treasury bond yields fell again yesterday as the rally following lower-than-expected US inflation data continued. However, yields have showed signs of stabilising overnight. Yields in the UK and the Eurozone are also down. The US dollar remains under downward pressure, pushing above 1.31 versus sterling for the first time since early 2022.