Is BoE Rate Hike in Doubt After Inflation Data?

GBP slides as core inflation falls below BoE target

Focus is back on the central banks on Wednesday as we await the second appearance this week of Federal Reserve Chair Jerome Powell and the Bank of England’s interest rate plans are questioned following some softer inflation numbers.

The pound is tumbling again on Wednesday after the latest inflation data for the UK threw a spanner in the works ahead of the BoE meeting in two weeks. There was a growing belief that the central bank will raise interest rates at the August meeting – rightly or wrongly – with the data this week seen providing additional support for such a move but the numbers we’ve seen this morning have done quite the opposite.

GBPUSD Daily Chart

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Earlier this year when policy makers were preparing a May hike, inflation was much higher and was seen as being a key reason behind the desire to raise rates. Had that number ticked higher again today, as was expected, it would – along with the other data we’ve seen recently – have provided policy makers an opportunity to follow through on previous plans without coming under too much scrutiny.

Fed Powell advances the dollar

With that not happening and core CPI falling to 1.9%, below the central bank’s 2% target, the decision becomes that much more difficult and uncertain. Moreover, the timing of the meeting is not ideal, with Brexit talks not going smoothly and only a few months in which they need to be concluded. Ordinarily, it would make much more sense for the Monetary Policy Committee to wait until November when much more clarity will exist over the economy and Brexit, but I’m not sure they will and market pricing appears to currently support this view.

UK Inflation

August rate hike still well priced in

An August rate hike is still 72% priced in, down from 77% yesterday, despite this morning’s release, which suggests investors do not believe policy makers will be deterred. The BoE’s credibility has long be brought into question, most recently in May when after months of hinting at a rate hike, it changed its mind due to first quarter weakness which it believed was transitory.

UK Interest Rate Probability

Source – Thomson Reuters Eikon

If it holds off again in two weeks despite the bounce back in the economy, people will seriously question whether any attention at all should be paid to the central banks forward guidance. For this reason, I think they will raise rates and hope they won’t be forced to reverse course in the near future, say if Brexit talks collapse.

Powell speech may offer little new information on interest rates

Attention will now turn to Powell’s testimony on the semi-annual monetary policy report in front of the House Financial Services Committee, where the Fed Chair is once again expected to deliver a very upbeat assessment of the economy and stick to previous views on rate hikes. The Fed has become one of the less interesting central banks due to its reliability and transparency – something that is very much a goal of all central banks – which is likely to make today’s appearance less of a market moving event.

USD/JPY advances to six month high post-testimony

That’s not to say that it doesn’t have the potential to cause market swings, rather that what Powell will say will likely already be priced in and so any movements are less likely to be significant. He may surprise us, should he get into a deeper discussion on trade wars for example and the implications for monetary policy, but as yet this is not something that has had an impact on the outlook.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

USD/JPY advances to six month high post-testimony

Economy faces years of strong jobs growth in a low inflation environment

The dollar continued to push higher in Asian trading, building on gains made in the previous session after Fed Chairman Powell’s described the US economy as in a good place during his semi-annual testimony before the Senate Banking Committee. He said he sees the economy on track for years of strong jobs growth in a low inflation environment. However, given the as yet unquantified threat of trade tariffs, he did mention that, while policymakers were on a path of gradual rate hikes, the tightening is not a “fait accompli” and implied it could be flexible should data dictate.

USD/JPY continued its march higher, touching its highest level in six months. Equity markets struggled to echo positive sentiment on Wall Street, with losses of 0.24% for the Nikkei, 0.99% for Chinese stocks and a loss of 0.33% for Singapore. The only bright spot was Australia where the index rose 0.16%. There were no key data releases in Asia, so other currency pairs drifted in line with the dollar’s advance.

Goldilocks economy warrants a Goldilocks Federal Reserve chairperson

Japan bolsters trade links with Euro-zone

Japan and the European Union signed a trade agreement yesterday that lowers barriers on the movement of goods and services between the two economies. The agreement has been a work in progress since 2013 and it may be more than just coincidence that the deal is finalized as the two economies face the problems of US protectionism.

While on the trade topic, the G-20 meeting gets under way in Argentina this weekend and treasury secretary Mnuchin has stated he will not seek a bilateral meeting with China during the get together. Meanwhile the US Treasury Department has reiterated that it labels China’s behavior as economic aggression.

GBP/USD – UK job numbers disappoint, send pound lower

UK dominates the data calendar

The data dump from the UK continues today. Following on from yesterday employment and wages data, today features CPI and PPI numbers for June. Headline inflation is expected to tick up to 2.6% y/y from 2.4%, according to economists’ forecasts while core data is seen edging up to 2.2% y/y from 2.1%The Euro-zone also reveals its inflation data while the US session has housing starts and building permits to contend with. We also have the second session of Fed Chairman Powell’s testimony before Congress and the release of the Fed’s Beige Book to look forward to.

You can see the full MarketPulse data calendar for today here: https://www.marketpulse.com/economic-events/

Oanda Market Beat

OANDA Market Insights podcast (episode 23)

OANDA Senior Market Analyst Craig Erlam reviews the week’s business and market news with Jazz FM Business Breakfast presenter Jonny Hart.

This week’s big stories: Trump NATO summit meltdown, Tory big beasts depart Cabinet, PM May defends Brexit white paper, Bank of Canada raises interest rates and the ECB releases the minutes from its June meeting.

Trade war and Trump European trip boost US dollar

GBP/USD – British pound slips over white paper blues

What sparked the dollar rally ? ( OANDA Trading Podcast on Money FM 89.3)

Markets higher as earnings season gets underway

Earnings season eyed as trade war fears remain

We’re seeing some risk appetite return on Friday even as concerns about trade remain front and centre and shows no signs of improving.

European equity markets are trading in the green on Friday, taking the lead from the US session on Thursday where tech stocks drove a rally that saw the NASDAQ hit a record high. With earnings season getting underway, investors will be looking for reasons to be more optimistic having spent months reading about the risks that a trade war poses to the economy.

JP Morgan, Citigroup and Wells Fargo will kick things off today and over the coming weeks, investors will be paying close attention not just to the results but also references to trade tariffs and the impact they are expected to have on future results, particularly those that have already been targeted in counter-measures taken or proposed against the US.

DAX steady as investors search for cues

Sterling slips as Trump warns of risks to US/UK trade deal

Trump has very much been in the spotlight this week, attending the NATO summit in Brussels before heading over to the UK to meet Prime Minister Theresa May. As ever, Trump was not afraid to express his views on the UK and Brexit ahead of the visit, warning that a trade deal with the US would not be possible under the model that May is seeking with the European Union, while also expressing his belief that Boris Johnson would make a good PM. This appears to have weighed on the pound in trade on Friday given the complications it could cause May and her team.

None of this will go down well with May – who has previously pushed strongly for this visit despite much protest – and comes at a terrible time for her but as Trump well knows, she is in a very weak position right now and is unlikely to fight back and, more importantly, he wants a Brexit that best suits the US. Whether Trump’s comments give more voice to dissenters among Brexiteers is yet to be seen but it certainly doesn’t help the PM as a trade deal with the US has long been touted as one of the benefits of leaving the EU.

First signs of tariffs impact in China’s June trade numbers

Chinese trade surplus increases as Trump plans more tariffs

Chinese trade data released overnight may be used as a source for Trump’s next attack on the world’s second largest economy, with exports having soared once again – rising 11.3% – increasing the surplus the country has with the US to $41.61 billion in June. While the main reason for such a spike is likely to be exporters front loading sales ahead of the tariffs being implemented, it’s likely that a stronger US economy and weaker yuan is also playing a role.

I expect this will be used as another example of the bad trade policies that Trump has repeatedly references but been unable to so far influence. Trump is attempting to force them back to the table with threats of another $200 billion in tariffs, something that has so far only been met with retaliation from China and others.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

Live FX Market Analysis – 10 July 2018 (Video)

In this week’s webinar, Senior Market Analyst Craig Erlam discussed the latest Brexit developments as two members of her team resign after an apparently united and productive meeting on Friday. He also talks Trump, after the latest imposition of trade tariffs and ahead of his trip to the UK and the NATO summit, and previews the week ahead.

Craig also gives his live analysis on EURUSD (12:20), GBPUSD (15:03), EURGBP (17:50), AUDUSD (19:35), USDCAD (24:12), GBPCAD (26:19), NZDUSD (28:31), USDJPY (30:22), GBPJPY (32:25) and EURJPY (34:52).

GBP/USD – British pound steady on modest GDP growth

USD/JPY – Japanese yen dips to 7-week low, inflation reports next

Commodities Weekly: Gold saved by dollar’s retracement

What does Davis resigning mean?

The resignation of a key driver of the U.K.’s Brexit process is a blow for British Prime Minister Theresa May, but analysts believe she can survive the departure.

Brexit Secretary David Davis resigned Sunday evening, objecting to May’s withdrawal plan that seeks to maintain close economic ties with the European Union (EU), rather than a harder separation favored by Davis and other so-called “Brexiteers.” Former Housing Minister Dominic Raab was named as Davis’ successor on Monday morning.

Analysts are seeing the latest move as a “crunch point” for May, but that the vagaries of British politics and need for leadership just nine months before the official Brexit date could mean that she can soldier on.

CNBC

May Faces Difficulties Keeping Cabinet United Over Brexit

Theresa May is braced for her Cabinet to split when the European Union rejects her demands for a sweeping free trade deal, after her senior team agreed to put off the hardest Brexit decisions until later.Despite the Cabinet truce after months of internal division, three senior government officials said May will face her most challenging task keeping her ministers united when — as they expect — EU leaders formally reject the British approach.The U.K. prime minister won the backing of her ministers to ask the EU for the most ambitious and wide-ranging trade agreement the bloc has ever signed, after a marathon eight-hour meeting at her country house on Thursday.

Source: May Knows Danger of Cabinet Split on Brexit Still Lies Ahead – Bloomberg

DAX Edges Lower as German GDP Slows in Q4

24 hours of reconciliation

50 50 Chance of Halting Brexit

Opponents of Britain’s exit from the European Union are preparing a major campaign they say now has close to a 50:50 chance of stopping Brexit by blocking Prime Minister Theresa May’s divorce deal, a leading pro-EU campaigner said.With Britain scheduled to leave the EU in March 2019, opponents of Brexit are exploring various ways to stop what they say is Britain’s biggest mistake since World War Two.‘Best for Britain’, a campaign group which received a 400,000 pound donation from billionaire financier George Soros last year, hopes to convince lawmakers in the 650-seat parliament to block the withdrawal deal May aims to bring back from Brussels in October.

Source: Chance of halting Brexit now close to 50:50, says leading campaigner – Reuters

DAX Edges Lower as German GDP Slows in Q4

24 hours of reconciliation

UK Growth Revised Lower

The UK economy expanded by less than previously thought in the last three months of 2017, official figures say.GDP grew by 0.4% in the October-to-December period, the Office for National Statistics (ONS) said, down from the initial estimate of 0.5%.The revision was due to slower growth in production industries, the ONS said.In 2017 as a whole, the economy grew by 1.7%, also slightly lower than previously thought and the weakest since 2012.

Source: UK economic growth revised downwards – BBC News

Futures Flat After Hawkish Fed Minutes

Dollar maintains its firmer tone

GBP/JPY – Bearish Breakout Ahead of Jobs Data and BoE

OANDA Senior Market Analyst Craig Erlam talks to Core Finance about the recent bearish break in GBPJPY and whether it signals more pain ahead. He also previews the UK jobs data and Bank of England inflation report hearing and what they could mean for interest rates this year.

USD/JPY – Japanese Yen Edges Lower as Japanese Manufacturing PMI Dips

BoE Hearing and Fed Minutes in Focus

DAX Under Pressure, Investors Eye Fed Minutes