UK inflation jump lifts Sterling, Dollar dips ahead of Fed meeting

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14 June 2017

thomasdodds

Sterling retraced some of its recent losses against its major peers on Tuesday with yesterday’s above forecast inflation data stoking speculation that the Bank of England could raise interest rates sooner-than-expected.

T
he revised level of inflation soared to 2.9% in May, its highest level since 2013, while the level of core inflation also increased to 2.6% from 2.4%. Inflation in the UK is now running well above the Bank of England’s 2% target and while Governor Mark Carney will likely continue to talk down the impact of higher prices, there is a limit as to how high inflation can go before it begins discussing the possibility of higher rates.

Last week’s general election also continues to dominate the headlines in the currency world. A deal between the Conservative Party and DUP is expected to be struck within the next day or so and should remove some short term uncertainty created following the hung parliament vote on Thursday.

We now look to this morning’s labour data out of the UK, with another downward surprise in earnings growth likely to heap selling pressure back on the Pound today.

Federal Reserve to hold rates, hint at future hikes

In the midst of the politically uncertain backdrop in the UK, the Federal Reserve in the US is overwhelmingly expected to raise interest rates again this evening for the third time since December. With a hike almost fully priced in by the market the reaction in the Dollar will be driven by the FOMC’s “dot plot”. There is a decent chance that we could see a modest downward revision in the Fed’s rate hike expectations following the slowdown in first quarter growth. However, we expect Chair Yellen to keep their options open for another hike at either the September or December meetings.

We may also get more details on the Fed’s plans to shrink the huge portfolio of bonds it accumulated on its balance sheet during the recent period of economic recovery. There has been significant speculation that the Fed could begin reducing the size of its balance sheet before the end of the year, although it would need to begin communicating this at either of the next couple of meetings.

In the lead up to this evening’s meeting we have this afternoon’s inflation numbers out of the US. Inflation is expected to have slowed modestly to 2% in May from 2.2%.

Eurozone sentiment improves as economy picks up pace

A modest bounce in the Euro on Tuesday morning was reversed yesterday afternoon with the single currency ending London trading mostly unchanged against the US Dollar.

Economic sentiment in the Eurozone continued to go from strength to strength this month. The monthly data from ZEW showed that economic sentiment in the Euro-area increased to 88.0 from 83.9. Overall confidence is expected to remain strong in the short term following a rebound in economic activity in the currency bloc that saw the Eurozone economy expand at a faster pace than the US in 2016 for the first time in eight years.

This morning’s industrial production data shouldn’t be a significant market mover and the Euro is likely to be driven almost entirely by this evening’s Federal Reserve announcement.