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No news from Downing St and the Fed limbers up…

No news from Downing St and the Fed limbers up…

GBP
UK inflation figures have hit a four-year high after CPI printed a 0.3% rise in May and the year-on-year figure rose to 2.9%, from 2.7%. Producer price rises have slowed slightly which should slow upward pressure on inflation. The consensus inflation beating data increased speculation that the Bank of England would need to tighten policy, although markets were expecting unchanged interest rates at this week’s meeting.

Theresa May still hopes to announce a coalition agreement with the Democratic Unionist Party (DUP). There was “optimism” that a deal could be reached within the next 24-48 hours while pressure mounted on the government to relax fiscal policy.

Over the medium term, a policy shift would tend to raise gilt yields and make a Bank of England rate increase more likely, especially in view of the inflation data. Hopes for a government deal and some speculation over a ‘softer’ tone towards Brexit provided net Sterling support with a move towards 1.2750 against the Dollar as the Euro edged below 1.1365 ahead of Wednesday’s labour-market data.

USD

Headline producer prices were, as expected, unchanged for May, while the ex feed and energy rate printed an increase of 0.3%, which was slightly higher than the forecasted increase of 0.2%. Overall, there was no evidence of sustained upward pressure on prices, which is not likely to have a significant impact on Federal Reserve policy expectations. The US NFIB small business confidence index was unchanged at 104.5 from June.

The Dollar struggled to gain any significant traction with caution ahead of the Fed statement. The markets have strong expectations that the Fed will announce a further increase in interest rates to 1.00-1.25%, and there will be a sharp Dollar depreciation if rates are not increased. Markets are not expecting the statement to be more hawkish than the one released in March. There is a focus on rate projections by individual Fed members and commentary on plans to start reducing the balance sheet, with Janet Yellen also holding a press conference.

EUR

The German ZEW index declined slightly to 18.6 for June from 20.6 the previous month, but there was no significant overall impact since the Eurozone indicator strengthened for the month and overall confidence in the outlook remained strong.

The Euro found some support below 1.1200 against the Dollar. According to CME Group, preliminary figures for Wednesday are showing futures traders kept building up business in EUR during the first half of the week, somewhat reinforcing the recovery vs. the Dollar seen since Monday.

Data to Watch:
07:00am EUR Harmonised index of Consumer Prices (MoM)(YoY), Consumer Price Index (YoY)(MoM).
09:30am GBP Claimant Count Rate, Claimant Count Change, Average Earnings Including Bonus (3Mo/Y), ILO Unemployment Rate (3M), Average Earnings Excluding Bonus, (3Mo/Y) 
10:00am EUR Industrial Production w.d.a, (YoY), Industrial Production s.a (MoM).
13:30pm USD Retail Sales ex Autos (MoM), Retail Sales (MoM), Retail Sales Group (May), Consumer Price Index Ex Food and Energy(YoY), Consumer Price index (MoM).
19:00pm USD FOMC Economic projections, FED’s Monetary Policy Statement, FED’s Interest rate decision, FOMC Press Conference

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