Trading Muted as Central Bank Bonanza Begins

The previous session was less about Trump – Kim Jong Un and more about Brexit. Theresa May avoided humiliation in the commons vote over amendments to the Brexit Bill. The promise that MP’s will get a meaningful vote later in the year on the terms of the Brexit deal lifted the pound to a day’s high of $1.3425; however, the strength of the mighty dollar, as US inflation printed in line at 2.8% and as investors eye a rate hike by the Fed, meant the rally was short lived.

Investors broadly shrugged off the historic, first Trump – Kim Jong Un meeting, with US markets muted ahead of the Fed’s rate decision due later today. Asian markets are giving a mixed performance which is expected to carry across to Europe on the open.

The big week for the pound continues with the FTSE expected to remain vulnerable to swings in sterling. With the Brexit vote now in the rear-view mirror attention will fall first to UK inflation figures before the FOMC rate decision later.

Inflation; Another Disappointment for Pound Traders?

UK data this week has raised concerns once again over the health of the UK economy, dimming the prospects of a BoE rate hike in August. Inflation in May is expected to remain constant at 2.4%, whilst core inflation, which removes more volatile items such as food and fuel, is also expected to remain constant at 2.1%. Given the surprisingly soft manufacturing numbers early in the week, plus wage growth unexpectedly ticking lower, a lacklustre, even if constant inflation reading seems more like another reason for the central bank not to hike rather than a compelling reason to lift interest rates. Disappointment could see the pound target $1.33 particularly in light of the strong US inflation and almost certain rate rise.

Fed to Hike, but 3 or 4 Questions Remain

The Federal Reserve is widely expected to raise interest rates by 25 basis points later today. The announcement will come this evening in addition to the Fed’s quarterly projections and will be followed by a press conference by Fed Chair Jerome Powell. The rate hike is as good as completely priced into the market. Traders will be looking closely for clues as to whether the Fed intends to hike once or twice more across the year.

At the last meeting in March the Fed continued with the message of three hikes across the year. However, US economic data has picked up considerably since then, with inflation (CPI) now at a 6 year high of 2.8%, well above the Fed’s 2% target.

Should the Fed lift its projection to 4 hikes instead of three (via the dot plot) we expect to see the dollar continue its charge higher. Meanwhile, should the Fed stay pat with 3 rates through the year, we would expect to see the dollar give back some of its recent gains. Markets are currently pricing in a 46% chance of 4 rate hikes across the year, meaning traders are fairly equally divided. Yet given the backdrop of troubled global trade, the Fed could be keen to hold off a little longer. CPI might be at 2.8% but PCE the Fed’s preferred measure of inflation, is still at just 1.8%, meaning time is still on the Fed's side.