Good morning,

Dollar rebounds as June seen as live

Yesterday was a day of rebounds – a stronger yen and USD, a weaker sterling and lower commodity currencies. ‘Turnaround Tuesday’s’ are a thing for reason.

Dollar strength peaked its head up through the US session yesterday evening as Fed speakers Williams and Lockhart emphasised that the Federal Reserve meeting in June is still ‘live’ for interest rate increases. We are of the belief that the US economy is nowhere near recession, as some people are happy to call for, and that chatter of negative interest rates are therefore rather perverse. While US data is weaker than we would ideally like at the moment, its solid progression leads us to believe that the next rate hike will be in September.

The Federal Reserve is simply not bold enough to hike rates with the referendum risk only 8 days after the policy meeting.

UK inflation lower but wages all important

Sterling spent most of the day supported by Monday’s strong telephone polls for the Remain campaign but its’s strength was chipped away by a worse than expected inflation number. CPI rose 0.3% in the 12 months to April with the clothing and air fares the major laggards. These price declines are seemingly as a result of a poor weather outlook meaning discounted summer apparel for shoppers whilst air fares fell having soared for the early Easter holiday. Easter often causes some volatility on a year by year basis as it switches from month to month and this weakness will almost certainly dissipate through the next month.

Today is unemployment day and while lower inflation may make the outlook for the consumer a little bit rosier, I’m sure we’d all like a slightly fatter pay packet come the end of the month. We expect that the unemployment rate will remain at 5.1% but without a subsequent pull higher in wages – something around 2.4% including bonuses – and these numbers are relatively meaningless in the short term. We can say pressures are building and be content that industry are not losing workers but, what was once the crown jewel of UK economic data is in need of a bit of spit and polish. The jobs figures are due at 09.30.

Japan flat over 6 months

Yen is also higher having a bright session after the Japanese economy surged forward in Q1, growing by 1.7% on an annualised basis. Japan’s Q4 dip was revised to a 1.7% fall from a 1.1% decline so there is little reason to be overenthusiastic about Japan’s prospects for exit velocity. Business spending is down 1.4% with corporates unwilling to spend cash reserves on anything, especially on capital investment although the wage picture is improving well.

An upcoming stimulus package and an additional impulse of monetary policy may help this at the Bank of Japan meeting but for now the yen is looking strong.

The Day Ahead

Finally, commodity currencies are volatile ahead of an oil market inventory report that should show a drawdown from stockpiles. Weak Australian wage numbers haven’t helped the AUD overnight.

Tonight’s Fed minutes are unlikely to shift the needle too much and we expect communications to emphasise that risks remain balanced and that while rates are likely to increase by the end of the year, near-term inflation and wage softness will preclude anything before Q3 at the earliest. They announce at 19.00 GMT.

Have a great day.

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