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Poor UK inflation could trigger corrective moves

Poor UK inflation could trigger corrective moves

GBP
UK Consumer prices, due this morning, are expected to accelerate to 2.6% in April year on year. Core figures, excluding volatile food and fuel costs, are also expected to arrive stronger at 2.2% in the reported month versus 1.8% previously. The Bank of England’s key 2% figure was exceeded. On a monthly basis, the consumer prices are expected to remain unchanged at 0.4% last month.

On a positive CPI print, we could see Cable break above the 1.2950 barrier, beyond which the quarterly high of 1.2961 could be tested, opening doors for a test of the 1.3000 level. Conversely, a downside surprise will cause the GBPUSD pair to break below 1.2890 level, leading to a subsequent break below monthly lows around the 1.2804 mark which is likely to drag the pair towards 1.2800.

The UK election is a little over three weeks away and the markets remain complacent of a Tory landslide (anything less than a 80+ seat majority for the ruling party will be viewed negatively). However, the focus remains on the Brexit negotiations and the continued uncertainty that swirls around the next 22 months and beyond.

USD

The Greenback remained on the back foot yesterday as the US Empire State Manufacturing Index fell six points to -1.0 in May. In the survey, the firms that did respond showed a drop in new orders which was under zero for the first time in several months at -4.4.

On the employment front, indexes remained positive in both employment and hours worked pointing towards continued improvement in the labour market. The softer than expected print supported EURUSD pushing the pair towards 1.0989 as well as the CME Fed Watch Tool moving from an 80% to 70% probability of a June rate hike.

EUR

French President Macron appointed Conservative Edouard Philippe as Prime Minister which helped boost optimism that the President would be able to pursue a reformist agenda. Macron also stated that EU treaty changes were no longer taboo and agreement by German Chancellor Merkel supported optimism.

The Eurozone is actually experiencing some suggestion of rising inflationary prospects and the European Central Bank (ECB) is now making noises on near-term rate hikes or other contractionary policies. ECB Chief Economist Peter Praet stated that the Bank would assess the balance of risks at the June meeting, but still needed to be very cautious surrounding any removal of policy accommodation. It is likely that in order for policy to change there would need to be “no downside risk” and inflation to be very close to or above 2%. If this happens, a reduction in asset buying is unlikely to appear any earlier than January 2018, followed by rate hikes towards the end of the year.

The Euro continued to gain support from expectations that the ECB would edge towards a reduction in monetary stimulus this year.

Data to Watch:
2:30am AUD RBA Meeting’s Minutes. 9:00am EUR ITA Gross Domestic Product (YoY) (QoQ) (Q1). 9:30am Producer Price Index – Output (YoY) (MoM) n.s.a. (Apr), PPI Core Output (MoM) (YoY) n.s.a. (Apr), PPI – Input (YoY) (MoM) n.s.a. (Apr), Consumer Price Index (YoY) (MoM) (Apr). 10:00am EUR GER ZEW Survey – Economic Sentiment (May), ZEW Survey – Current Situation (May). 10:00am EUR Trade Balance n.s.a. (Mar), Trade Balance s.a. (Mar), Gross Domestic Product s.a. (YoY) (QoQ) (Q1). 1:30pm USD Building Permits Change (MoM) (Apr), Housing Starts Change (MoM) (Apr). 2:15pm USD Industrial Production (MoM) (Apr), Capacity Utilisation (Apr).

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