Fed hawkish but cautiousThe Federal Reserve (Fed) raised interest rates by the expected 25 basis points to a new range of 1.75% to 2.0%. The Fed then raised the forecast for the remainder of 2018 to two more interest rate hikes, however didn’t increase its forecast for post-2018. In the press conference following, Fed Chair Jerome Powell announced the Fed will allow Inflation to overshoot its 2% target and expects that inflation will remain around 2.1% until 2020.The US Dollar initially gained after the announcement with GBP/USD dropping to $1.3307 before recovering back towards $1.34. The initial gains for the dollar were due to the upgraded rate forecasts for 2018, however, market participants could have paused on buying the dollar with the Fed willing to allow inflation to overshoot, giving investors one less indicator to judge future interest rate hikes. The recovery in GBP/USD was also supported by the technically important $1.33 support level. Dollar moves for the remainder of the week could hinge on the outcome of the ECB meeting.
Inflation doesn't offer any BOE cluesUK inflation data released remained at 2.4%y/y for May, missing the forecasted rise to 2.5% and left Sterling pretty flat against the Euro and US Dollar. The small increase in inflation was expected due to the rising oil prices, with fuel prices in the UK at a 3-year high. However, without this materialising, it left a confused picture as to what action the Bank of England (BOE) will take in relation to interest rates. With inflation staying close to the BOE target of 2% without intervention by the bank, and disappointing wage growth data this week, there is arguably little impetus for the BOE to act on raising interest rates. However, if the bank does not start to gradually increase rates now, it will leave the BOE with very little wriggle room to act in the event of any shock to the economy post Brexit (source: Reuters).The government survived relatively unscathed last night in the voting on the Brexit legislation amendments in the House of Commons. MP’s voted against the proposed amendments from the House of Lords that would have seen the UK remain part of the European Economic Area (EEA) and be part of the customs union post Brexit. It does point the way to a ‘harder’ Brexit, which hasn’t helped Sterling, though the government was expected to win these votes so it hasn’t caused too much of a shock. Eyes will now be turned to the EU summit on the 28th-29th of June. There will be expectation that a white paper on UK Brexit legislation can now be produced in July.Retail sales data is released at 9:30am this morning, with an increase of 0.5% m/m forecasted for May compared to 1.6% printed in the previous month. Sterling is just holding $1.34 at the moment against the USD, so this number will need to at least hit the forecast for the pound to make upside progress today.
Will the Euro steal the show?The Euro continues to wrestle for the $1.18 handle against the US Dollar, as it has done for the past six trading sessions. GBP/EUR remains afloat €1.13, but is still failing to gain any significant upside traction to test €1.14 for now. Despite having ticked off some key risk events already this week, the reactions in the currency market have been somewhat muted. All eyes are now on the European Central Bank (ECB) to possibly deliver some fireworks. At 12:45pm the ECB release its deposit rate decision, with no change expected, but at 1:30pm ECB President Mario Draghi holds a press conference, which could reveal whether the central bank will end its stimulus programme by year-end.Comments made by a number of ECB policymakers last week triggered a wave of demand for the common currency, as investors took speculative bets on the ECB delivering this hawkish message, along with an interest rate rise by June 2019. Whether policymakers actually make the decision in today’s meeting or hold off until next month will be key in determining the subsequent direction the Euro will take. Perhaps the market overreacted to the hawkish hints made last week, and the ECB will hold off tapering its current quantitative easing (QE) programme once again, which would likely see the Euro weaken.EUR/USD could unwind its recent recovery and potentially fall back below $1.17. In addition, Sterling could capitalise on Euro weakness and leap over the €1.14 handle. However, if the ECB do discuss tapering QE today, demand for the common currency could swell and drag GBP/EUR under €1.13, back to March lows.