Yellen to the rescue

CPI figures on Friday were mixed-to-poor. With the (potentially) one-off rise in energy costs due to hurricane season unlikely to be sustained, the Federal Reserve will be reticent to hike rates in a slowing-inflation environment. Nonetheless, countering the dollar drop off late Friday, Fed chair Janet Yellen told reporters that “we continue to expect that the ongoing strength of the economy will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2% longer-run objective.”

She added that her “best guess is that these soft [inflation] readings will not persist and, with the ongoing strength of the economy, will warrant gradual increases in that rate to sustain a healthy labor market and stabilize inflation around our 2% longer-run objective.”

Reassuringly, markets are still pricing in a 77% chance that interest rates will rise before the end of the year as of this morning and Fed Chair Janet Yellen backed up such an assertion in her hawkish speech.

Brexit negotiations appear to strike a new low

According to reports, British ministers are said to see Brexit talks breakdown if the European Union refuses to compromise further. At present, the outstanding issues still revolve around the so-called ‘divorce bill’ – a key hurdle that negotiators on both sides will have to conquer in order to make realistic progress on the UK retaining Single Market benefits throughout any transition period.

Sterling’s come off in response, with GBP/USD pulling away from overnight highs above 1.33. The reaction has been somewhat limited – when talks breakdown or deadlock, one of the last options left for the UK’s negotiating team is to storm out of talks and claim foul play. This will do little to soothe already fraught British business confidence if material progress isn’t made anytime soon.

No clarity on Catalonia

Catalan President Puigdemont has not clarified whether his address to the Catalan parliament last week constituted a declaration of independence. The letter to Prime Minister Rajoy delivered this morning stated that “More than two million Catalans gave the regional parliament a democratic mandate to declare independence” and that “Our proposal for dialogue is sincere, despite all that has happened, but logically it is incompatible with the actual climate of growing repression and threat.”

The longer the semi-autonomous region delays a commitment or U-turn on independence, the longer tensions will run high between Madrid and Barcelona which will inevitably affect funding decisions, political stability and, ultimately, the economic strength of the country.

The calendar’s quiet for the rest of the session, but traders will be closely watching UK inflation numbers in the early hours of Tuesday.

Have a great day.