Tories strike deal with DUP, weak data weighs on Dollar

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27 June 2017

thomasdodds

Sterling edged marginally higher against its major peers as markets opened for the week on Monday on the news that Theresa May’s Conservative Party had at last struck a deal to form a minority government with the DUP.

M
ay concluded two weeks of talks with the Northern Ireland party, sidestepping a potentially messy situation that would have arisen should a deal have failed to be agreed within the Queen’s one week deadline set last Wednesday.

Political news out of the UK is now firmly focused on the Brexit negotiations, which formally began last week. Brexit minister David Davis claimed on Sunday that he was “pretty sure” he could negotiate a good deal with the EU. However, with Theresa May’s majority now gone, it is clear that the ability of the weakened government to strike a favourable deal with the European Union has been dealt a significant blow.

The debate as to the timing of a possible interest rate hike by the Bank of England will heat up this morning when Governor Mark Carney speaks following the release of the central bank’s Financial Stability Report. Policymakers in the UK surprised the market at their latest meeting, with three members of the MPC voting for an immediate hike. While Carney himself has maintained a relatively cautious tone in recent communications, we think there is now a very good chance we could see higher rates in the UK before the year is out should inflation continue to accelerate above 3% in the coming months.

US Dollar slips after soft durable goods data

A fairly underwhelming set of economic news out of the US yesterday sent the Dollar to a one week low against the Euro. Durable goods orders were largely disappointing, with sales declining by 1.1% in May versus the -0.6% consensus, the second straight month of negative growth. The report adds to the string of recent economic data out of the world’s largest economy that suggest growth in the second quarter of the year might be slightly softer-than-expected. While the Federal Reserve appeared to overlook the recent slowdown by hiking interest rates earlier this month, financial markets are now not pricing in another rate increase until December.

Today looks to be a relatively busy day in the US with a number of Federal Reserve policymakers scheduled to speak, namely Harker, Kashkari and Chair Janet Yellen.

Dovish Draghi, German business sentiment jumps

Last night’s comments from President of the ECB Mario Draghi provided some support for the Euro as he claimed deflationary pressures had been replaced by reflationary ones. However, Draghi talked up the benefits of keeping ultra-low interest rates in place and it is clear to us that the central bank remains in no rush to begin tightening policy.

Meanwhile, yesterday’s business confidence data continued to show reason to be optimistic about the overall health of the Eurozone economy. The latest German business climate index from IFO rose to an above forecast 115.1 from 114.6, its fifth consecutive monthly increase and its highest level since 1991. This bodes well for overall growth in the currency bloc this year which increased to its fastest level in a year in the three months through March.