Inflation Uncertainty [Video]

The Day So Far…

The market has paused for breath this morning as participants digest the latest communication from the Fed Chair. The main takeaway was that inflation will now need to be monitored with the utmost vigilance as to ascertain how confident the Fed can be in that prices will return and remain at target once through this ‘transitory’ period. With this in mind we have the PPI data due for release today at 1.30pm followed by arguably the more important CPI report tomorrow. To add some additional flavour to the mix we also have US retail sales on Friday in additional to the first of the big banks to officially kick off earnings season. As such, much like yesterday the next three trading sessions should hold plenty of opportunity moving forward.

Looking at the FX market, GBP has outperformed adding to the gains seen yesterday following a minor improvement in the latest UK wage data. Some of the renewed interest has come following comments from BoE hawk Ian McCafferty in an interview with the Times newspaper where he outlined his view that the Bank should consider unwinding its £435bln QE programme earlier than planned. The comment is not entirely surprising given he was one of the three MPC members to have voted for an immediate rate rise in the June meeting but it does highlight the split present within the Bank of England with the Deputy Governor Ben Broadbent stating on Wednesday that he was not ready to raise rates given there are many ‘imponderables’ in the UK economy. The outcome to this debate is that from a trading perspective MPC comments are key and given this focus Brexit related headlines seem to have taken a back seat, at least for the time being.

The Day Ahead…

Our strategy for today is a continuation of the dovish inspired theme that drove price action yesterday. Given the timing it would seem odd for Yellen to change the language on the inflation issue if she didn’t believe there could potentially be a problem. As such, I would imagine most of the market will be leaning on the fact today’s PPI numbers and tomorrow’s CPI data could err on the weaker side. Meanwhile, with US oil output now back up to the best level of the year, following another 0.68% increase in yesterday’s data, we prefer shorting WTI with an entry eyed on a pull back to pivot.