US hikes, UK likely to hold
The UK unemployment rate held at 4.6% in the three months to April, equalling a 42-year high, maintaining confidence in the labour market. The main focus was on average earnings data with year-on-year growth declining to 2.1% from a revised 2.3%; a 12-month low. The data increased concerns over consumer spending and wider growth trends. Sterling had already moved lower ahead of the data which limited the impact.
GBPUSD strengthened following more conciliatory headlines around a Conservative-DUP deal and a softer Brexit sentiment echoed by Chancellor Hammond, but the gains were given up after the Fed rate decision. A high degree of political uncertainty persists amid fears of damage to the economy, especially with Brexit talks looming.
The Bank of England is expected to leave monetary policy on hold at today’s meeting. Concerns over the growth outlook are likely to offset unease surrounding inflation, although the vote split will be important. Sterling selling above 1.2800 against the Dollar was a feature as it held near 1.1365 against the Euro.
US economic data releases were significantly weaker than expected and had an important impact on weakening the Dollar into the Fed policy decision. Headline and underlying retail sales both declined 0.3% for May compared with expectations of a small increase, maintaining fears surrounding the underlying outlook for growth.
Consumer prices fell 0.1% in May, compared with expectations of no change, and the annual rate declined to 1.9%. The core increase of 0.1% was below consensus expectations too, and the year-on-year rate was below 2.0% at 1.7%, down slightly from 1.9% previously. The Dollar came under strong pressure with the Euro testing seven-month highs near 1.1300 before fading slightly.
The Fed increased interest rates by a further 0.25% to 1.00-1.25%, which produced only a 50 pip bounce against the Pound. The median rate projections were for a further one rate increase by the end of 2017. Fed Chair Janet Yellen was optimistic surrounding the labour market and expected the inflation decline to be due to one-off factors but that inflation developments would be monitored very closely. The Dollar regained some support after reassuring rhetoric from Yellen caused the Euro to dip back towards 1.1200.
In what was a busy day in other markets there was an absence of high tier data from the Eurozone. Movement seen yesterday was most likely due to political and economic data coming out of the US. Euro found some support from a renewed risk-aversion wave that gripped markets on the back of oil price weakness and negative Asian indices.
With a lack of significant drivers from the Euroland today, the single currency could be subject to volatility. With big releases in the UK and the US, the Euro could see further gains against the major pairs.
Data To Watch:
7:45am EUR Inflation Ex Tobacco (MoM), Consume Price Index (EU Norm) (MoM) (YoY).
9:30am GBP Retail Sales (YoY) (MoM), Retail Sales ex-Fuel (YoY) (MoM).
11:00am EUR Trade Balance n.s.a (Apr) Trade Balance s.a (Apr).
12:00pm GBP BoE Interest Rate Decision, BoE Asset Purchase Facility, Monetary Policy Summary, BoE MPC Vote Unchanged, Boe MPC Vote Cut, BOE MPC Vote Hike, Bank of England Minutes.
1:30pm USD Initial Jobless Claims (Jun 9), Philadelphia FEd Manufacturing Survey (Jun)
2:15pm USD Initial Production (MoM), Capacity Utilization (May)
3:00pm USD NAHB Housing Market Index (Jun)