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UK government notches up win over Brexit but gains for Sterling limited

Today’s macro highlights:

  • GBP - CPI Inflation (May)
  • USD - FOMC monetary policy

UK government notches up win over Brexit but gains for Sterling limited

UK wage growth may have come in a little short of expectations yesterday, making it a slightly harder call over whether we’ll see a Bank of England rate hike in August, but the bigger concern for those with Sterling exposure was how the government fared in the Brexit amendment votes. Theresa May came out on top, but a hard Brexit is back on the table and given the number of concessions that have been reportedly offered to win this round, the next debate could be even harder to win. GBP/EUR managed to hold onto the bulk of the half-cent gains, but more impressive upside on GBP/USD proved unsustainable. Perhaps it’s no surprise that the Pound remains on the back foot after yesterday’s apparent victory - the risk of uncertainty down the road remains.

9.30am BST sees the release of the latest UK inflation data. After the shortfall in the GDP estimate on Monday and the lacklustre wage growth reading yesterday, this print will be closely followed. The Bank of England has that target range for inflation and needs to keep the reading under 3%. We’ve got 2.4% forecast and although against the numbers we’ve seen already this week a big jump higher seems unlikely, anything that gives the impression the economy is running a little too hot would certainly add to upside for the Pound as it’s going to push Mark Carney into making that next rate hike.

At 7pm BST, the Federal Reserve will announce their latest move on interest rates. Expectations are that we will see a quarter point added, but any clues as to what happens beyond this will be more influential. With US economic growth seeming to be flattening out, the overtly hawkish stance we’ve seen adopted of late may yet be wound in. What to watch for are suggestions that there’s only one more hike left this year instead of the previously tipped two, whilst the idea that there would be a further three hikes in 2019 may also be dialled down significantly. As the market looks to interpret the messages, dollar volatility could well be left looking rather exaggerated this evening. 

We saw a risk on rally yesterday morning as the US/North Korea summit broke up, but gains were quickly eroded. A second notable rally was posted as the UK government made progress in the Brexit vote, but again this ebbed away as the market interpreted some hawkish tones from possible Federal Reserve policy reform. The fact we keep finding resistance here does suggest that an upbeat inflation print today could leave the pair poised to move higher. 

Similar to GBP/USD, early risk-on inspired gains were eroded by the broader dollar recovery. With limited economic data out of the Eurozone today, gains could well prove hard to find in the short term, although a more dovish outlook over US rate hikes would pave the way for sustained gains. 

The pair posted an impressive rally off the back of the early progress in the Brexit vote and managed to consolidate those gains. We do however need to see more sustained moves higher if the overall upward trend is to be re-established. Today’s UK inflation reading could be key here.

Did you know…

Ahead of the ECB rate setting meeting tomorrow, the longest period the bank has gone so far without changing interest rates is 30 months, between June 2003 and December 2005. The Deposit Facility rate is currently -0.4% and it’s been there for 27 months now. However with the ECB needing to taper its bond buying before raising interest rates it seems inevitable that we’re on course for a new record to be set this year.