And Then There Were Two

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In the UK, the Tory leadership race is now coming to a close. Now it's just down to two candidates, who will face a vote from the party membership of around 160,000. The Conservative Party leadership contest has been whittled down to Boris Johnson and Jeremy Hunt. There will be a series of hustings across the country in the coming weeks, with party members set to choose the new leader in the week commencing 22 July. Johnson remains the bookmaker favourite to become the next PM. He has vowed to renegotiate the Brexit agreement and has said a departure from the EU on 31 October is “eminently feasible”. The EU has insisted the Withdrawal Agreement (containing the Irish backstop, divorce bill and citizens’ rights) will not be reopened, but amendments to the non-binding declaration on the future relationship could be made.

His remaining competitor for the top job, Jeremy Hunt, the foreign secretary, is not perceived as so much of a threat. He backed Remain in the 2016 EU referendum and has the support of just 11 per cent of party members, according to the ConservativeHome website. But Mr Hunt’s camp contends it has a trump card: what it says is its candidate’s greater trustworthiness and competence. In particular, it maintains that the next stage of the contest could expose Mr Johnson’s Brexit policy as cynically unrealistic. Ladbrokes, the bookmakers, give him odds of 8:1 but it's not over until its over! BoE Governor Carney and fellow MPC members Cunliffe, Tenreyro and Saunders will testify on the May Inflation Report at the Treasury Select Committee on Wednesday. The global assumptions underpinning the Inflation Report now appear to be on the optimistic end of the scale, while the Bank also said this week that “the perceived likelihood of a no-deal Brexit has risen”. As noted above, the Bank still expects moderately higher interest rates in the coming years, but markets will be alert to any nuanced changes that might be detected in the mindset of rate-setters. US interest is likely to centre on Fed speakers and personal spending data (Fri), including the deflator, for May. The G20 Osaka summit takes place on 28/29 June (from next Friday). US President Trump is expected to hold an “extended meeting” with his Chinese counterpart Xi on the sidelines with the aim of resuming trade negotiations to ease tensions (or at least not escalate them further). Trump has previously threatened to impose tariffs on all Chinese imports, but has held off so far. Clues to Trump’s stance may come from US Vice President Pence’s speech on China (Mon). Among next week’s Fed speakers, Chair Powell will discuss the economic outlook and monetary policy (Tue). Other voting members scheduled to speak are Williams (Tue) and Bullard (Tue). As for the data, the spending figures are expected to be broadly consistent with last week’s retail sales report which suggested that consumer spending is likely to provide a greater impulse to Q2 GDP. Still, overall Q2 GDP growth is expected to soften from Q1 (forecast to be revised up to an annualised rate of 3.2% on Thursday). The PCE deflator is predicted to show inflation remaining below 2%, enabling the Fed to counter any downside risks to US economic activity. Analysts forecast the annual headline and core PCE deflators to be unchanged at 1.5% and 1.6% respectively.

EU leaders this week failed to reach an agreement on candidates for key roles, including the presidencies of the European Commission and the ECB, which will become vacant later in the year. The process to find a compromise candidate for Commission President has begun and an emergency summit has been called for 30 June. In light of ECB President Draghi’s Sintra comments opening the door to further policy easing, key attention next week will be on the Eurozone flash CPI for June (Fri), preceded by some national releases including Germany (Thu). Analysts predict Eurozone headline CPI to stay at 1.2%, with higher core CPI (up to 1.0% from 0.8%) offset by lower energy prices. Although core inflation has been volatile in recent months due to Easter timing effects, it remains well below the ECB target. Also in focus will be the German IFO business survey (Mon) where analysts look for a modest improvement to the headline index to 98.1 from 97.9, but it remains markedly weaker than last year. The European Commission will also release its economic sentiment survey (Thu) which analysts forecast to be softer.

Next week, will see the release of UK data on Business and Consumer Surveys for June, including the CBI Retail Survey (Tue), GfK Consumer Confidence (Fri). A slight fall in the headline Consumer Confidence index to -11 from -10, with concerns about the economic outlook remaining high despite robust indications for personal finances. The ONS will release an update of Q1 GDP (Fri), expected to be unrevised at 0.5%. The Bank of England currently predicts Q2 GDP growth to be flat (previously 0.2%).

See you next week! To discuss how the above may affect you, please contact your Currency Dealer at Heritage Pay on +44 (0) 203 858 7274.

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