The hope that there would be a further moderation in tensions surrounding the Ukrainian conflict after EU foreign ministers refrained from introducing phase three sanctions against Russian yesterday may have just been dashed, as reports have hit the wires this morning that pro-Russian rebels have downed two Ukrainian fighter planes near the Savur Mogila region in Eastern Ukraine. Should these reports be substantiated in the coming hours, the failure of the rebels to scale back hostile activity will throw a wrench in the negotiations between the East and the West, highlighting that either Putin doesn’t have as much control over the rebels as previously thought, or doesn’t seem to have enough motivation to assert his power in order to get a handle on the spiraling situation. Watch for new developments in the Ukrainian conflict to drive risk appetite this morning considering there is a relatively sparse economic calendar for North American traders to parse through.
The big mover for FX in the overnight session was the Aussie, as the antipodean currency rocketed above the 0.94 handle against the USD after consumer prices for Q2 came in as expected and the CPI reading on a y/o/y basis increased to 3.0%. The up-tick in inflationary pressures will be expected to keep Reserve Bank of Australia firmly entrenched in their neutral stance towards monetary policy, with the outside chances of further easing in the coming months getting dialed back with inflation rising to the 3.0% mark. The regional stock index was able to take the rise in consumer prices in stride, gaining 0.6% despite the probability of further near term stimulus being downwardly revised.
Turning our attention to the UK, the minutes from the monetary policy meeting that was held from July 9-10 were released overnight, and conveyed a relatively dovish tone towards the future path of monetary policy. Members of the MPC seemed less worried about the potential for inflationary pressures to heat up given that growth was forecast to slow in the second half of 2014, and that even though job creation has been progressing at a blistering pace, the lag in rising wage growth continues to signal excess slack in the labour market. Much like the Fed it is increasingly likely the BoE will want to commit more focus towards ancillary labour market indicators such as wage growth to try and deduce the amount of slack in the economy, so watch for that to have a bigger impact on Sterling price action in the months ahead. The Pound has been in a steady slide post-release of the minutes, yet GBPUSD has managed to find some support just north of the 1.70 handle, a strong area of congealed support that will be tough to crack unless the bullish unwind picks up further steam.
Heading into the North American open, S&P futures are dipping their toes into positive territory and looking to build from yesterday’s gains. Hydrocarbons are finding a bid as reports of downed Ukrainian fighter planes and an FAA ban on flights to Israel have traders looking to gain exposure to energy. The Loonie has latched on to the gains in the AUD overnight and was able to generate further support after the Retail Sales number for May came in warmer than expected with a m/o/m increase of 0.7%. Looking past the headlines wasn’t as optimistic with the core reading coming in with only a 0.1% gain after backing out the more volatile auto sales and parts numbers. USDCAD was waffled post-release with a moderate offered tone, though the pair has managed to find some supportive bids in the low 1.07s.
The remainder of the session is scant in terms of economic releases, though tomorrowwe will have a dearth of global PMI data that may be able to steal some of the limelight from the geopolitical conflicts littering the financial market landscape. Given many developed central banks have risen their concern surrounding risks to the downside in global economic growth for Q2, Chinese and European PMIs for July and the start of Q3 should be important considerations for risk appetite, so watch for these readings to influence price action early tomorrow morning.
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