Pound Lower on Inflation disappointment: All eyes now to the Fed

Trading was muted on Wednesday, with the FTSE remaining in a tight range as investors look ahead to the Fed’s rate decision later this evening. Whilst a weaker pound supported the FTSE, falling oil prices and a sharp decline in Just Eat, weighed on the index.

Concerns that OPEC are on the cusp of relaxing the oil production cuts saw oil majors including Shell and BP trace the price of oil lower and dominate the lower reaches of the FTSE. Meanwhile, Just Eat shed over 10% as rival Deliveroo ramps up competition. Deliveroo’s new service will challenge a marketspace where Just Eat has dominated without much in the way of competition. Suddenly we are seeing a sharp increase in competition by food delivery apps to win market share – we predict that the easy ride for Just Eat is now well a truly over.

Pound struggles as inflation unexpectedly remains steady

The pound dropped to a low of $1.3308 after inflation in the UK unexpectedly remained constant at 2.4% in May, rather than ticking higher to 2.5% as analyst had expected. Even recent large rises in the cost of oil has failed to boost inflation as rising costs at the pump have been offset. This data, in addition to soft numbers earlier in the week - manufacturing output hit a 5-year low and wages growth unexpectedly declining suggests that the UK economy has failed to regain momentum in the second quarter casting a large shadow over the case for an interest rate rise at the end of the summer.

Dollar lower ahead of FOMC

Investor attention will now turn to the FOMC rate decision this evening. A 25-basis point rate rise has been completely priced in by the markets. As is customary when the Fed rate hike is fully priced in, investors will instead look towards expectations of the future path of hikes. The markets are divided as to whether the Fed will stick with 3 hikes or whether policy makers will push for 4 hikes. The CME FedWatch shows 4 hikes being 51% priced in equivalent o the flip of a coin.

Whist US economic data is strong, unemployment below 4% and inflation is high at (CPI) 2.8% and upgrade of economic projections could be on the cards yet, trade war concerns could encourage the Fed to sit tight a while longer. Furthermore, the fact that PCE, the Fed’s preferred measure of inflation remains below target at 1.8% means the central bank still has some room to breathe.

The dollar has declined across the European session ahead of the FOMC rate decision, with few looking to take on large positions prior to the announcement.  Should the Fed upgrade economic projections and we hear a more hawkish tone, the dollar is likely rebound targeting 94.00 versus a basket of currencies.