Global Themes

Fed set for June hike
- Fed sticks to script 
- Construction fails to prop up Sterling 
- Inflation and GDP set to disappoint ECB hawks

USD

Fed sticks to script
The US Federal Reserve (Fed) left interest rates unchanged at 1.50%-1.75% as expected last night. 

The US Dollar weakened after the announcement, this allowed GBP/USD to rise to $1.3651, before retracing and closing out at $1.3574. EUR/USD failed to break and hold above $1.20 and closed the trading session at $1.1937. The Fed statement noted a strong jobs market and how inflation is moving closer to the banks 2% target. According to the futures market, the probability of an interest rate hike in June has risen from 92% to 95% overnight (source: CME).

Dollar traders will now switch their attention to Friday's data releases, with nonfarm payroll, average earnings and unemployment data to be released at 1:30pm. Market participants will be looking for strong data releases to firm up the potential interest rate hike in June. If economic data falls under expectations this could reduce the likelihood of the Fed raising rates.

GBP

Construction fails to prop up Sterling
Sterling continued to fall yesterday against most of its major peers despite UK construction PMI rebounding, beating forecast to rise to 52.5 against an expected 50.5 for the period of April.

Though yesterday’s sell-off was relatively muted in comparison to previous trading sessions, it still extends GBP/USD to a new 3 ½  -month low of $1.3552. A rejection of this level saw the pair retrace back above the $1.36 handle, with a consensus that current sentiment sees cable in oversold territory. GBP/EUR remained stuck in a relatively tight range yesterday, unwilling to break out of a 60-pip range, to open this morning around the mid €1.13 level.

The last of the PMI releases this week will see the services data released this morning at 9:30am. There could be more focus on this data as the UK prides itself in the services sector and is a large contributor to GDP. This morning’s number is expected to see services PMI rise to 53.5 from 51.7 for the month of April. This number however many not be enough to snap Sterling’s recent slump.

In Brexit news, UK Prime Minister Theresa May is facing opposition on her most recent proposal, with a 6-5 split against her in the cabinet. Pro-Brexiteers and hard-line Conservatives are banding together to push for a hard-line break from the EU’s customs union. Having access to the customs union has been increasingly the top issue in Brexit talks, with the EU highlighting it is the only way to avoid a hard Irish border. With in-fighting set to remain on the cards for a while, a breakthrough in developments could hurt Sterling if it confirms that the UK is leaning towards a hard Brexit. Local elections take place today, and much like in the last general election, the focus will be on which party takes the most of the former UKIP voters. UKIP still holds council seats and is expected to lose all of them, and which party those voters move to will be key for both Theresa May and Jeremy Corbyn.

EUR

Inflation and GDP set to disappoint ECB hawks
The Euro is struggling to regain the $1.20 handle against the US Dollar after dipping as low as $1.1936 in overnight trading.

Today's inflation release could be key to see if a new trading range could develop. The flash CPI estimate is released at 10:00am and is expected to show inflation unchanged at 1.3% y/y. This number is well below the European Central Bank’s (ECB) target of 2% and is unlikely to spur market participants to rally the Euro higher. Another headache for the ECB could be the flash estimate inflation figure, less food and energy, which is forecast to come in below the last reading, 1.2% against 1.3% y/y.

GDP data released yesterday showed growth in the Eurozone slowed to 0.4% from 0.6% q/q, it also fell to 2.5% from 2.8% y/y. The slowdown was forecasted so it wasn’t a big shock to the markets and was largely put down to the same factors that were attributed to the poor UK GDP release for Q1; issues such as potential trade tariffs with the U.S, adverse weather conditions, and Brexit. The underwhelming data does add further fuel to the idea that the ECB is less likely to be ending stimulus measures in September 2018.

ECB Vice President Vítor Constâncio and board member Peter Praet are both speaking this afternoon, any comments they make regarding ECB sentiment going forward will be closely scrutinised after this week’s releases.




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