Good morning,

USD: Quieter Korea, Stronger Dollar

Another day wherein the focus is not on the tensions between the US and North Korea is a day for dollar advances with the greenback below the 1.18 and 1.30 levels in EURUSD and GBPUSD respectively this morning.

The USD was also helped by comments from New York Fed President William Dudley who said that he would “be in favour of doing another rate hike later this year” if the economy holds up. He also solidified expectations that the Federal Reserve will start drawing down its balance sheet at the September Fed meeting in an effort to undo some of the stimulus that the US economy relied on in recovery from the Global Financial Crisis.

His comments on inflation and wages were pretty standard in so much that both are expected to rise and that the next 6 months will be crucial to tell whether inflation is naturally rising or whether the recent uptick in price increases has been a blip.

US retail sales are due at 13.30

GBP: Inflation due this morning

It feels like inflation is the be all and end all of UK focused macroeconomics and certainly given the influence of sterling upon price levels the past year has seen a huge increase in focus on CPI. Today’s number is an important reading but can only be truly recognised for its importance once the context of tomorrow’s wage numbers and Thursday’s retail sales data is taken into account.

There is an argument to say that today’s CPI release, unless an absolute flyer, is likely to be negative sterling. Anything on consensus or slightly above is unlikely to prompt people to buy the pound if they believe that the Bank of England hasn’t got the stomach for a rate hike and any fall in inflation naturally takes the pressure off. Indeed, a very low number could be seen as a positive if it undoes some of the real wage pain.

We do not believe that inflation has peaked in the UK quite yet and a run towards 3% is still possible by October. That is, in or eyes, not enough to drag the Monetary Policy Committee of the Bank of England to a decision to raise interest rates.

Sterling is a shade above the 1.10 level against the euro at the moment but spent a good portion of the morning yesterday in the 1.09s. Any break below 1.0983 and the pound will be at its weakest level post Brexit and the lowest level since March 2010.

Brexit: Meet the new trade ties, same as the old trade ties

Plans as to the customs arrangements that the UK wants to hold with the European Union will be published today. David Davis will be looking for a customs union that is “transitional” but would also “facilitate the freest and most frictionless trade in goods between the UK and the EU” and “ensure that there is no return to Ireland-Northern Ireland borders”.

That sounds a lot like membership of the single market to me.

The data calendar is calm apart from UK inflation and US retail sales.

Have a great day

Jeremy Cook, Chief Economist