FX – Mild Risk On Post US/NK Agreement

Market Drivers June 12, 2018
US and NK sign agreement – no details
UK Wage data misses but cable rallies
Nikkei 0.33% Dax 0.14%
Oil $66/bbl
Gold $1297/oz.
Bitcoin $6800

Europe and Asia:
GBP UK Claimant Ccount -7.7K vs. 11.3K
GBP UK Wages 2.8% vs. 2.9%
EUR GE ZEW -16.1 VS. -14.9

North America
USD CPI 8:30

The action in FX markets was dominated by news of a US/North Korea agreement that reaffirmed the goal of denuclearization of the Korean peninsula. The currency market saw a mild risk on rally immediately post news with EURUSD rising from lows of 1.1758 towards 1.1800 and cable popping from 1.3345 to 1.3410.

Follow through, however, has been limited with both pairs stalling at the figure as the agreement was short on details as to how the actual verification and denuclearization process would proceed. President Trump provided little color in his post-summit press conference sticking to generalities and this absence of hard facts left markets unsatisfied with London session traders looking to US data for further catalysts.

The economic picture from Europe was mixed with UK labor data showing surprising gain in employment growth but missing slightly on wages while investor sentiment in Germany slumped to 2012 lows in the wake of trade disputes with the US.

In UK the claimant count printed at -7.7K versus 11.9K eyed but average wages grew by 2.8% versus 2.9% forecast. Still, real wages eked out a 0.1% gain as they continued to keep pace with inflation and tomorrow’s Inflation report should prove to be key. If the data prints at 2.4% as expected it would provide evidence that inflation is stabilizing while wages are growing albeit slowly and that could offer some support to the very oversold pound.

The euro meanwhile was hit with a low ZEW reading which came in -16.1 vs. -14.9 but the data reflected the already well-known trade tensions between US and EU and barring any further salvos from either side was well priced it. After dipping slightly the single currency bounced back and tried to climb back above the 1.1800 figure which for now is proving to be formidable resistance to the bulls.

Although the US/NK deal failed to provide any concrete evidence of action, it has certainly changed the geopolitical tone in the region and for now at least the markets are likely to give the benefit of the doubt that both parties are negotiating in good faith which should, in turn, provide some better risk flows as the day proceeds. At very minimum the end of war games by the US and the moratorium on missile testing by North Korea should keep the region risk free for the near term and that sentiment could provide a calmer environment for the markets.

On the eco calendar today the market will get a look at US CPI data which is projected at 0.2% with core forecast at 0.1%. Unless the number prints in negative territory the reaction is likely to be minimal for the dollar as the market has priced in a virtual guarantee of rate hike tomorrow. If on the other hand, the inflation data proves hotter than expected the dollar could rally strongly across the board reversing all the gains in risk FX so far as markets will expect a hawkish statement from the Fed tomorrow and perhaps ratchet expectations of 4 hikes this year.