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Brainard pushes US rate hike off the table

Brainard pushes US rate hike off the table

Sterling has recently managed to shrug off concerns of a Brexit hangover and has succeeded in recovering thanks to favourable economic data. Recent unemployment, retail sales and industrial production data have all performed better than expected.

Despite there being no tier one data released yesterday, it rallied back above 1.3300 versus the Dollar and strengthened to around 1.1870 against the Euro. The market is showing some signs of volatility as the forces driving the probabilities of an interest rate rise in the US are being offset by data showing the resilience of the British economy.

A sharper than expected gain for the UK inflation data release this morning would cast further doubts on the potential for any further cuts in UK interest rates. This is especially true as there has already been uncertainty surrounding the potential for further monetary action following stronger than expected data. The market anticipates that the inflation data will show an increase in the annual rate to 0.7% from 0.6%. Weak data would likely trigger a Sterling sell off.

This Thursday we will have the scheduled Bank of England monetary policy meeting at 12:00pm and the subsequent policy summary report. No change in interest rates is expected. However, a lot may depend on whether there are any members of the board voting for a rise and the Bank’s consideration of the UK economy.

In the US, Fed Governor Brainard maintained a generally dovish stance with a further call for patience when it comes to a rate hike. Although there had been progress in the labour market, she argued that low inflation allowed the Fed to be patient and look for further labour market improvement. In her opinion, the risks of acting too soon in tightening were higher than waiting too long.

The Euro rallied back above 1.1250 versus the Dollar, but was unable to sustain the gains and consolidated just below this level. Fed Funds futures indicated that the chances of a September move to raise rates had declined to around 15% which curbed potential Dollar support with the US currency little changed on Tuesday.

Data to Watch: 7am EUR German Final CPI MoM. 9:30am GBP UK CPI YoY, PPI Input MoM. 10am EUR ECB President Draghi Speaks, EUR German ZEW Economic Sentiment. 7pm USD Federal Budget Balance.

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