• What to watch for
  • UK PM May rushing to assemble government
  • Greenback on the backfoot after producer inflation data
  • Sterling rallies on higher CPI

Producer prices not enough to deter the Fed

US producer prices slowed in this morning’s release: growing at a rate of 2.4% on the year. While the downtick was only 0.1ppt it must feel uncomfortable for the Fed to consider hiking rates in a disinflationary environment. Nonetheless, the FOMC appear to have taken confidence in the smooth absorption of rate hikes earlier in the tightening cycle to proceed with doing so this week. With equity markets close to all-time highs, a dollar that’s weaker on the year and very manageable treasury yields there’s little else stopping Yellen and Co from proceeding as planned. We’ll go into more depth on the Fed decision tomorrow.

“I’ll get us out of this mess”

Theresa May faced down some reportedly very upset Conservative MPs yesterday in her first face-to-face meeting with her party since last week’s election. By admitting responsibility, opening up the decision-making process in government and reaching a broader consensus on the approach to Brexit, May apparently looks to hold on to office for the foreseeable future. Whether she will do so is anybody’s guess, but it’s already becoming apparent that negotiations with the European Union will now be markedly different to how they would have been had they taken place this time last week.

Lack of clarity still hurting Sterling

For the pound, the messages are mixed. A softer Brexit and a closer relationship with Europe (which is beginning to look more and more likely) should be net positive for sterling, as shown when May announced her intentions to withdraw the UK from the Single Market and Customs Union earlier this year and the pound plummeted. But, sterling ebbed ever lower yesterday, touching the lowest levels against the US dollar since mid-April. It’s clear that the market sees last week’s election result as a significant weakening of the UK’s hand in the Brussels talks, and a wounded Conservative negotiation team could easily oversee more delays, more missing deadlines on fixed timelines and therefore a more disruptive version of Brexit.

EURUSD:  Weaker dollar helps lift the pair, but monthly highs just below 1.13 look safe for now.

GBPUSD: On the front foot after dropping close to 2% since the election. Rising inflation gives the Bank of England less time to use low rates to prop up the economy.

AUDUSD: Rally in precious metals helps lift the Aussie, with the weaker dollar also playing a part.

USDCAD: Canadian dollar hits the highest levels of the month, despite oil prices still being subject to OPEC policies. US dollar in driving seat for now.

USDJPY: Following a shake-up in US tech stocks, the yen rallied yesterday, but a recovery in sentiment has helped USDJPY move back to unchanged on the week