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The Pound weakened broadly during early trading Wednesday while both the Dollar and Euro edged higher as markets refocused on fundamentals in the wake of several days where financial markets had been driven largely by geopolitics.
GBP Eyes Inflation after PM May's Brexit Compromise
The Pound was a fraction weaker against most developed world currencies early in the Wednesday session as traders took up positions before the release of the latest UK inflation numbers, which are expected to show the consumer price index stabilising in May after several months of declines.
Consensus suggests markets are looking for the consumer price index to hold steady at 2.4% for the month of May, drawing an apparent line under a three-month downtrend. Core consumer prices are seen rising at a steady pace of 2.1%.
If forecasts are correct then Wednesday's data could prove to be a neutral affair for Pound Sterling, that does nothing to alter the already-reduced odds of an August or November rate hike from the Bank of England. But any surprise increase in consumer prices can be expected to lift hopes of a rate rise and Pound Sterling.
"GBP’s focus today will be on UK CPI; any miss may fuel the story that GBP base effects are unwinding quicker-than-anticipated and this could well dampen sentiment over an August BoE rate hike. This would keep GBP on the defensive – with soft data and a muddled Brexit political environment – adding little attacking threat," says Viraj Patel, an FX strategist at ING Group.
The data comes after Prime Minister Theresa May ceded ground to a group of so called rebels in parliament, agreeing an amendment to the EU Withdrawal Bill that requires MPs to approve the next course of action if the PM has not secured a Brexit deal the House of Commons can support by the time November comes along.
Opposition as well as government MPs had been pushing for a "meaningful vote" on the final deal in parliament, which would have enabled them to send the PM back to the negotiating table in Brussels if they did not like the eventual agreement that had been struck.
Tuesday's compromise could be said to award them exactly this opportunity, just using different language, although it also enables the PM to claim the government has avoided what would have been an damaging defeat in parliament.
"We’re hoping that we won’t see the headline ‘Sterling takes a dive’ this summer – and certainly the odds of this appearing in financial newswires have been cut after PM Theresa May avoided a defeat in the House of Commons on the Brexit Bill ‘meaningful vote’ amendment," Patel adds.
US Dollar Eyes Federal Reserve Meeting
The US Dollar rose broadly during the morning session in London Wednesday as traders took up positions ahead of the June Federal Reserve monetary policy meeting, which is expected to yield a second 2018 interest rate rise.
Economists are unanimous in forecasting a rate hike Wednesday, with all 40 that were polled by Bloomberg News this week claiming the Federal Reserve will pull the trigger.
This suggests there is little upside to be had for the Dollar from any one rate rise alone so markets may look to the accompanying statement for a so-far-elusive hint that policymakers may soon step up the pace at which they are raising American interest rates.
An absence of such clues may see the US Dollar give way to renewed losses. If the Fed delivers by suggesting to markets it could soon contemplate a step change in policy, then it might be enough to help the greenback extend a two month winning streek that saw the Dollar index convert a 4% 2018 loss into a 1.7% gain during the eight weeks to the middle of June.
"We wouldn’t be surprised to see either the language over current policy settings in the Fed statement changing or – and if the Fed are truly shaking things up – the infamous ‘dot plot’ disappear," says ING's Patel. "We should prepare for higher short-term US interest rate volatility – and in the current market environment, this will be seen as USD positive. Expectations for a hawkish Fed are, however, high; any signs of Chair Powell easing up a bit could see risk rebound sharply."
European Central Bank Looms Over the Euro
The Euro also rose broadly during the early morning session Wednesday as traders took advantage of an empty economic calendar by positioning for the eagerly anticipated June monetary policy announcement from the European Central Bank, due around noon on Thursday.
Markets are looking for a firm commitment from the governing council to winding down the ECB's quantitative easing programme later in 2018. This would open the door to a possible 2019 interest rate rise for the Eurozone, which would normally be supportive of the Euro, but slower economic growth in the first half and fears over the outlook for international trade could easily scupper the central bank.
"The euro goes into this World Cup summer shy of confidence – plagued of late by the somewhat recurring niggling injury of Eurozone politics, " says Patel. "Those EUR investors looking for a magical Silva bullet at this week’s ECB meeting could be left disappointed; the ECB may at best give the EUR a short-term boost, but for more sustained gains we’ll need to see confidence restored over the Eurozone growth outlook – and capital flowing back into Europe."
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