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Will UK inflation rescue the pound?

23-May-2018

The last two days have been very slow in markets with very little going on. But, the action is likely to start today with the UK inflation release this morning and the latest Fed meeting minutes this evening.

Latest Rates
GBP/USD
GBP/EUR
GBP/AUD
GBP/CAD
GBP/CHF
1.3375
1.1407 1.7760 1.7224 1.3255
GBP/JPY
GBP/HKD
GBP/ZAR
EUR/USD
EUR/GBP
147.28 10.4976 16.9217 1.1713 0.8760
Investec currency forecasts as at 1 May 2018
Q2'18 Q3'18 Q4'18 Q1'18
GBP/USD 1.38 1.39 1.40 1.41
GBP/EUR 1.14 1.15 1.15 1.14
Data releases
09:30 UK Inflation
14:45 US PMIs
15:00 Eurozone Consumer Confidence              
19:00 FOMC meeting minutes (May)
Key Levels
Support
Resistance
1.3400 1.3550
1.1400 1.1480

Market overview

The last two days have been very slow in markets with very little going on. But, the action is likely to start today with the UK inflation release this morning and the latest Fed meeting minutes this evening.

Markets are still awaiting formal news on the next Italian Prime Minister and key government positions, despite 5 Star and Lega Nord reaching an agreement on a governing coalition last week. Giuseppe Conte has been put forward as the coalition’s candidate for Prime Minister. However he has yet to be approved by President Mattarella, with reports suggesting that there are various concerns about his lack of political experience and his ability to manage the role. A decision could come today, but a report in La Repubblica has also suggested that 5 Star leader Di Maio may be back in the running, which if true would likely upset Lega Nord. The key position of Finance Minister has also yet to be announced, although Paolo Savona looks to be the front runner for the position, but again reports have suggested that the President is uncomfortable with the nomination. Overall, Italian problems are set to rumble on, with the key issue of the Prime Minister and the make-up of the Cabinet very much up in the air.
South Korean President Moon Jae-in told Donald Trump said that “there’s a chance, a very substantial chance, it won’t work out”, referring to the June 12th meeting with North Korean Leader Kim Jong Un (note, this concern had already been voiced last week). However, he also acknowledged that “that doesn’t mean it won’t work out over a period of time”. At the same meeting, Trump responded to a reporter asking whether he was pleased with the U.S. trade talks with China by saying “no, not really”, though he added, “they’re a start”.

The yield on US 10-year Treasuries was flat at 3.06%, ahead of today’s release of the Fed meeting minutes this evening. Investors will be reading very carefully for any references to inflation. A dovish outlook would likely result in a pullback in yields and a weaker US Dollar. At the moment, the US Dollar is failing to continue the upward move, which started in the middle of April that saw the currency appreciating about 5% against a basket of major peers. The Dollar eased by less than a tenth of one percent on the day, and has been largely trading sideways for the past week.

The day ahead

UK Inflation figures for April are due at 9.30 this morning. Our house forecast is for a small rise in the rate of inflation to 2.6% from 2.5% in March, compared with consensus estimates of 2.5%. We see upward pressures from three sources; i) a rise in petrol prices (and a decline 12 months ago); ii) a rebound in furniture prices after a decline in March; and iii) an increase in soft drink prices from the sugar levy. In the afternoon, we see the latest PMI releases in the US followed by the May FOMC meeting minutes.

Thought of the day

Octopuses are weird looking. Not only this, they have eyes with camera-like adaptability, sophisticated camouflage capabilities, three hearts, can regenerate limbs, and do something that no other organism can: they can edit their own bodies by routinely changing their DNA to adapt to their environments. Pretty weird, yes, but weird enough to suggest they actually come from space? I’m not so sure. This was the conclusion of 33 well respected scientists after an extensive study, summarizing decades of research, and published in the peer-reviewed journal: Progress in Biophysics and Molecular Biology this week. These scientists, who supposedly come from respected institutions, say the advanced biology of octopuses isn’t an enigma but instead “borrowed from a far distant ‘future’ in terms of terrestrial evolution, or more realistically from the cosmos at large.” If by any chance one of the 33 scientists happen to be reading this, would you mind giving the dealing number a call on 020 7597 4000 - I have few questions.

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