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Inflation deflates rate hike expectations

Inflation deflates rate hike expectations

GBP
Headline UK CPI inflation data ticked down to 2.4% for April from 2.5%, failing to meet forecasts and pushing any perceived rate hike further into touch. The core rate also fell to 2.1% from 2.3%, below forecasts of 2.2%. PPI input prices printed slightly weaker than expected but the core output prices rose more than expected. The data overall reinforced negative Sterling sentiment and the chances of an August rate hike fell to around 30% from 50% previously.

Sterling stumbled to near 1.3300 against the Dollar (five-month lows) as the Euro pushed to highs near 1.1260. The Pound did manage a mild recovery later in the session with consolidation above 1.3350 against a generally weaker Dollar. Today’s retail sales data is expected to show a slight increase on the month.

USD

The Dollar strengthened further yesterday, recovering all its losses from Tuesday as geopolitical worries intensified in response to President Trump casting some doubt on the North Korean Summit and suggesting a lack of progress on trade talks with China.

Last night saw the Federal Reserve (Fed) minutes in which the Dollar weakened across its main competitors. The Fed Committee indicated that they expect to raise rates again at next month’s meeting; the minutes did not, however, send a clear signal regarding what the Committee expects to do in the second half of the year. Moreover, they continued to express some uncertainty about the resilience of inflation and inflation expectations.

FOMC members William Dudley and Harker Bostic will be seen speaking in the mid-American session later this afternoon.

EUR

Data for the Eurozone yesterday largely disappointed. PMI manufacturing index fell to an 18-month low of 55.5 for May as the services-sector index decreased to 53.9 with notably poor readings for France and Germany. The data overall reinforced a slowing sentiment surrounding economic growth.

European Central Bank (ECB) council member Coeure made comments that the growth slowdown did not concern him and he was increasingly confident that inflation would pick up. Markets overall foresee a further delay in any ECB rate hike and today’s minutes will hopefully give an insight into this.

Finally, Italian bond markets saw further selling pressure as the European Union Commission advised that financial instability in Italy could bubble over to the Eurozone. The Euro rerated sharply to new 2018 lows around 1.1685 against the Dollar.

Data to Watch:

07:00 GER Gfk Consumer Confidence Survey (Jun)
07:00 GER Gross Domestic Product w.d.a (YoY) (Q1)
07:00 GER Gross Domestic Product (QoQ) (Q1)
07:00 GER Gross Domestic Product (YoY) (Q1)
08:00 USD Fed’s William Dudley speech
09:00 GBP BOE’s Governor Carney speech
09:00 EUR EU Financial Stability Review
09:15 USD Fed’s William Dudley speech
09:30 GBP Retail Sales ex-Fuel (YoY) (Apr)
09:30 GBP Retail Sales ex-Fuel (MoM) (Apr)
09:30 GBP Retail Sales (MoM) (Apr)
09:30 GBP Retail Sales (YoY) (Apr)
09:30 EUR ECB’s Praet Speech
11:30 EUR ECB’s Praet Speech
12:30 EUR ECB Monetary Policy Meeting Accounts
13:30 USD Continuing Jobless Claims (May 11)
13:30 USD Initial Jobless Claims (May 18)
14:00 USD Housing Price Index (MoM) (Mar)
15:00 USD Existing Home Sales (MoM) (Apr)
15:35 USD FOMC Member Bostic speech
18:00 GBP BOE’s Governor Carney speech
19:00 USD FOMC Member Harker Speech

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