Powell ‘Fed’ Up
UK inflation was unchanged with June’s year-on-year CPI rate held to 2.4%, below a forecasted 2.6%; energy prices were negated by price discounting. Core CPI also declined to 1.9% from 2.1%, well below consensus forecasts of 2.2%. Output prices were also slightly disappointing with a small increase in the annual rate to 3.1% from 3.0%.
The Pound slumped below 1.3020 against the Dollar as UK bond yields declined the Euro pushed to highs near 1.1200. Futures market pricing indicated the chances of an August Bank of England interest rate increase had declined to below 70%. Underlying Brexit concerns are a drag on sentiment, but by the afternoon reports emerged that the EU could extend the Article 50 timeframe triggering a modest correction stronger against the Dollar.
Sterling opens against the Dollar at 1.3060 and the Euro just above 1.1235. Retails Sales is the sole UK data.
The US Dollar did a good job extending its run into Wednesday, with the Buck feeling better about scaled back US protectionist rhetoric and a more upbeat Fed Chair. Softer inflation data out of the UK and Eurozone added fuel to the Dollar’s run, with the Pound taking the biggest hit, dropping to yet another yearly low.
The strong rally slowed down a touch midweek as analysts picked apart US Federal Reserve Chairman Jerome Powell’s testimony to US lawmakers on Tuesday and found instances of doubt which took the edge off the optimistic thrust which had previously driven markets higher. The phrase which raised alarm bells was Powell’s “for now” condition before “the best way forward is to keep gradually raising the federal funds rate.” After further analysis it has now been interpreted more specifically as referring to the risk of the Fed raising interest rates too fast too high and thereby slowing growth and damaging the economy.
Eurozone inflation was confirmed at 2.0% from 1.9% in May, but there was a downward revision to 0.9% for the core rate from 1.0% in the flash reading. Expectations of higher inflation fell and maintained the potential for a dovish ECB policy which hampered the Euro.
Data to watch:
09:30 GBP Retail Sales (MoM) (Jun)
09:30 GBP Retail Sales (YoY) (Jun)
09:30 GBP Retail Sales ex-Fuel (MoM) (Jun)
09:30 GBP Retail Sales ex-Fuel (YoY) (Jun)
13:30 USD Continuing Jobless Claims (Jul 6)
13:30 USD Initial Jobless Claims (Jul 13)
13:30 USD Philadelphia Fed Manufacturing Survey (Jul)