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Return of rate hike

Return of rate hike

GBP 
Underlying selling pressure eased on the Pound yesterday and there were advances against the Euro, pushing to 3 week highs around 1.1049 before falling back.

The government won the first parliamentary vote on the EU withdrawal bill which had some impact in underpinning Sterling, although it will be a long process with a series of votes over the next few months.

UK inflation data is the order of the day with consensus expectations for an increase in the headline rate to 2.8% from 2.6% previously with an increase in the core rate to 2.5% from 2.4%. A stronger than expected increase would revive pressure for the Bank of England to hike interest rates, especially in view of recent currency weakness. There was evidence of Sterling short covering ahead of the Bank of England statement given the potential for a more hawkish policy stance, but selling will be seen if the inflation data and Wednesday’s earnings data is weaker than expected.

EUR

Several ECB members commented on monetary policy yesterday, although nothing new came to light. The ECB’s Benoît Coeure stated that quantitative easing policies had been successful and also suggested that the persistence of subdued inflationary pressure meant that medium-term monetary policies were likely to remain looser for a longer period. Nowotny commented that the removal of monetary stimulus should be gradual and clear. Mersch stated that the central bank has seen very little pressure on inflation and that the evolution of prices isn’t where the ECB wants it yet. The comments overall suggested the central bank was determined to keep policy expectations in check. Interest rates would remain extremely low which undermined the Euro to some extent with pressure for a correction.

USD

With no major US economic data there was relief that damage in Florida from hurricane Irma had been slightly less than feared. The latest New York Fed survey on inflation recorded a slight downturn in the 12-month expected rate to 2.49% from 2.54% previously which continued to dampen expectations of higher interest rates. The Dollar gained some support during the day with relief from last week’s selling and the Euro dipped to below 1.2000 and lows around 1.1950 after the European close before a slight rally on Tuesday amid a lack of fresh incentives.

Data to watch:

9.30am UK CPI, Core CPI, PPI, Core PPI, RPI

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