UK Inflation to Drive the GBP, with Trump and Powell to Direct the USD

Upward momentum in the Dollar resumed following Powell’s testimony on Tuesday, with today’s testimony and noise from the Oval Office likely to influence, with inflation numbers out of the UK to hit the Pound.
Bob Mason
GBP/USD weekly chart, July 16, 2018

Earlier in the Day:

Following a relatively busy start to the week, there were no material stats scheduled for release through the Asian session, leaving the markets to consider Powell’s Tuesday testimony to the Senate, Trump’s sudden backtrack on his agreement that Russia had not meddled in the 2016 Presidential Election and of course, there’s always the ongoing trade war to consider and whether the U.S and China will be able to find common ground in the weeks ahead.

While Trump may have perplexed the markets once more, FED Chair Powell was able to restore some order, talking of strong economic growth and the need to continue to raise rates at a gradual pace to keep inflation at bay.

Across the majors, the Japanese Yen was down 0.08% to ¥112.97 at the time of writing, with the Kiwi Dollar was down 0.06% to $0.6779. Upward momentum for the U.S Dollar also weighed on the Aussie Dollar, which was down 0.08% to $0.7383.

In the equity markets, the ‘risk on’ mood saw the Nikkei up 0.72% at the time of writing, supported by a further pullback in the Yen off the back of Powell’s positive assessment of the U.S economy. The Hang Seng and CSI300 saw some respite, with gains of 0.27% and 0.5% respectively, with the ASX200 clawing back some of the week’s losses, gaining 0.72% ahead of the close.

The Day Ahead:

For the EUR, it’s another relatively quiet day on the data front, with key stats limited to the Eurozone’s June inflation figures. Focus will be on the headline June figure that is forecasted to reflect softer inflationary pressures, with the finalized annual rate of inflation and annual rate of core inflation numbers unlikely to have a material impact barring deviation from prelim figures.

Outside of the numbers, geo-political risk remains ever present, with the threat of fresh tariffs on the EU a continued possibility that could hit the EUR.

For now, in spite of a general view that the U.S economy is under threat of unravelling, should the trade war become extended, policy divergence remains in favour of the Dollar, with the Eurozone’s inflation sitting well below the ECB’s close to 2% target.

At the time of writing, the EUR was down 0.12% to $1.1647, with today’s inflation numbers and political noise from Capitol Hill likely to be key drivers through the day.

For the Pound, it’s another important day on the economic calendar, with June’s inflation figures scheduled for release. Following some disappointing May wage growth figures released on Tuesday, the prospects of an August rate hike have diminished, as wage growth struggles to keep pace with inflation.

With Brexit in the mix, a hold on rates, after some hawkish chatter, would be a painful U-turn for the Pound, which found little support from the British Prime Minister’s Brexit plan passing through parliament, with just six votes preventing a vote of no confidence.

The Pound reflected market sentiment towards May’s troubles at the helm and fresh uncertainty over the outlook towards monetary policy, sliding to a session low $1.30687 before recovering to $1.31 levels by the close on Tuesday.

At the time of writing, the Pound was down 0.05% to $1.3108, with today’s data the key driver, though expect some chatter from the EU on the latest parliamentary vote that saw Britain take an EU Customs Union off the table should negotiators fail to garner a free trade agreement.

Across the Pond, economic data out of the U.S is limited to June housing data numbers, with building permits and housing starts scheduled for release. While upbeat numbers tend to be Dollar positive, the housing sector reflective of economic conditions, FED Chair Powell and President Trump will likely remain the main areas of focus.

Following Trump’s backtrack and FED Chair Powell’s upbeat views on the U.S economy and policy, tonight’s testimony could provide further support, though the ongoing trade war remains the curve ball for the FED, the U.S economy and ultimately the Greenback.

At the time of writing, the Dollar Spot Index was up 0.06% to 95.038, with direction through the day hinged on Powell’s 2nd day of testimony and any noise from the Oval Office, trade likely to be an area of focus once more.

For the Loonie, it’s a quiet day on the data front, leaving the Loonie in the hands of market risk appetite and the direction of crude oil prices, while chatter on NAFTA has begun to hit the headlines once more, with Mexico looking to get the ball rolling following Obrador’s election victory.

At the time of writing, the Loonie was down 0.11% to C$1.3206 against the U.S Dollar.

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