Inflation and FOMC Minutes to Drive the GBP and USD

Daily Update - 23rd May 2018

Yesterday’s Market

•             GBP Inflation Report Hearings

•             USD Richmond Fed Manufacturing Index

Yesterday Explained

On Tuesday, the US Dollar got once again market's favor, underpinned by strong US data. The Richmond Fed Manufacturing Index was showing a higher than expected reading which was bullish for the USD.

The GBP/USD pair attempted to regain the upside and traded as high as 1.3491, but was unable to hold on to gains and retreated toward the1.3430/40 price zone. BOE's members testified before a parliamentary special committee on inflation, offering quite a dovish stance. Carney remarked that rates will remain low if the UK economy doesn't pick up, dashing hopes for an August hike

Today's Market

•             EUR Markit Manufacturing PMI

•             GBP Core Consumer Price Index, Retail Price Index

•             AUD RBA's Governor Philip Lowe Speech

•             USD FOMC Minutes

Today’s Focus

On Wednesday, it’s a busy day in the markets, with geo-political risk gripping ahead of a busy economic calendar, for the EUR, after a particularly quiet start to the week, May’s prelim private sector PMI numbers out of France, Germany and the Eurozone will provide direction, focus likely to be on wholesale inflation numbers and new orders and Germany’s numbers in particular, following the soft 1st quarter growth figures released last week. Nonfarm payroll figures out of France ahead of the PMI numbers will likely have a muted impact.

On the data front, PMI forecasts are for a further softening that would be a negative for the EUR, with the Italian coalition government and general sentiment towards the Eurozone economy and outlook for policy also negatives mid-way through the 2nd quarter.

For the Pound, it’s a big day, with April’s inflation figures scheduled for release this morning, together with house price figures that will likely be ignored. March’s figures had contributed to a material shift in sentiment towards monetary policy in the run up to the May policy meeting, giving today’s figures particular relevance ahead of tomorrow’s retail sales figures.

Across the Pond, it’s also a big day for the Greenback, April’s prelim private sector PMI numbers scheduled for release, together with April new home sales figures, with the release of the FOMC meeting minutes later in the day the key driver for the Dollar today.

There’s been plenty of debate over how the FED has interpreted the recent improvement in economic indicators and rise in inflationary pressures, with FOMC members having contrasting views on whether the FED should or needs to take a more aggressive rate path through the remainder of the year.

While the markets will need to wait for next month to reassess the median forecasts, a green light for a June rate hike will be a must for the chance of a 4th rate hike for the year to remain priced in. Anything dovish and there’s a lot of ground for the Dollar to give up in response.

Ahead of the minutes, prelim manufacturing and service sector PMI numbers out will provide some direction, with service sector numbers needing to continue impressing to support a pickup in economic growth in the 2nd quarter.