Good morning,

USD: Fed more important for dollar than Trump/Kim summit

Donald Trump and Kim Jong Un have announced that they have reached an ‘agreement’ following their talks in Singapore although the details of what they have agreed have not been made public as yet. The talks, such as they are, are not a particularly market moving event although USDJPY has run higher, possibly on the simple fact that the talks did actually go ahead.

Ahead of tomorrow’s Federal Reserve meeting the latest US inflation numbers are due at 13.30 this afternoon. We expect higher oil prices will have given the figures a leg higher.

The focus of tomorrow’s Fed meeting has fallen away from the question of whether rates will go higher – markets are pricing in a 97% probability that they do and there has been no guidance to the contrary from policymakers – and the key question now is what the Federal Reserve can say to calm emerging market pressures.

Higher interest rates and the expectation of further hikes in the US drives dollar buying, similarly tax cuts for US businesses has seen dollars float back into the US economy and out of the coffers of emerging market economies, making their debts more expensive and harder to service. The attempted reversal of global trade flows should also prompt a buying of dollars so the monetary, fiscal and trade policy stances of the US economy are USD positive and causing pain for a lot of emerging market economies.

The Federal Reserve announce their decision tomorrow at 19.00 BST.

GBP: Brexit rebellion looks to be over before the votes

Yesterday was not a good day for the UK economy with industrial and manufacturing production numbers falling heavily, trade numbers having their second worst month ever and news coming from Poundworld and Jaguar Land Rover of redundancies totalling more than 6,000 workers.

The trade numbers showed a deterioration in our trading account position with the UK only able to post a £14bn goods deficit in the month of April; the second largest of all time. A weak pound is simply not enough to bring exporters business at the moment, something that has to be concerning for those sectors focused on foreign demand at a time when our customs relationship with the EU is being treated like a political football.

Reports from Westminster this morning suggest that Theresa May’s meeting with Tory MPs last night has been enough to quell the rebels. Although the PM is said to have not offered any substance on how she plans to achieve a custom arrangement with the EU alongside frictionless trade along the Northern Irish/Irish border, her words have been enough. Much like most of European politics at the moment this is a kick of the can until the vote on the Customs and Trade bills due next month. Between now and then we have an EU summit – June 28/29th.

GBP: Paying it forward

Before the votes begin, we have UK jobs data at 09.30. The recent trend for the UK’s claimant count has been increasing and employment readings within the PMI sentiment surveys have been deteriorating so an increase in joblessness would not come as surprise. This could also contribute to a slowing of wage gains.

With growth weak and inflation coming back towards target, the low rate of employment is doing a lot of the heavy lifting of the expectations around a Bank of England rate hike sometime this year. There is a 66% chance of an increase in borrowing costs by the end of the year according to the latest bets; an increase in unemployment will see that probability and the pound likely slip to new lows for the year.

Have a great day.

Jeremy Thomson-Cook, Chief Economist