Market lacking impetus

U.K. rate hike likely in Autumn

As the FX market enters its summer hiatus, speculation is growing over the timing of a rate hike in the U.K. There is an uneasy feeling that the “natural anchors” on inflation being relied upon by BoE Governor Mark Carney may not be enough to bring inflation more into line with the Government’s target.

Hiking rates in a slowing economy risks choking off any growth potential but monetary policy remains in an experimental state as additional support in place since the financial crisis is prepared to be withdrawn.

Of course, a lot will depend on the success or otherwise of Brexit negotiations which are set to continue through the summer. Sterling should get a lift once a free trade agreement is in place. David Davis, the U.K. Brexit Minister was quoted in the weekend press as saying that he is confident that such a deal is within reach.

Sterling remains in a tight range buoyed by plentiful liquidity. It is supported at 1.2580 and 0.8850, currently trading at 1.2740 and 0.8780.

Further headway is likely to be difficult without fresh positive news.

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Single Currency likely to benefit from positive data

The “rosy glow” in which the Euro is basking is set to be reaffirmed as data continues to improve across the whole region. Apart from Greece, which has its own issues, there is an almost universal strengthening in economic activity.

This week sees the release of consumer and industrial confidence data which provides a forward-looking idea of economic activity and intentions.

Growth in both sectors is expected to be healthy. Although the consumer has been slow to respond to improving economic conditions.

Inflation in Germany is due for release and while individual countries data is not supposed to influence the ECB, a further fall from 1.5% to 1.4% month on month following last month’s fall from 2%, will lessen the pressure on the ECB to hike rates.

Eurozone-wide inflation is also released and following Germany’s lead, that is likely to show a drop from 1.4% to 1.3%. This will confirm Mario Draghi’s view that given the inflation outlook, a rate rise is “some way in the future”.

The euro is still finding it tough going to break and hold above 1.1200 against the dollar but there is good buying interest between 1.1160 and 1.1180.

Fed appears in confused state

As we reach the halfway point in 2017, speculation will increase as to whether Janet Yellen will be confirmed for a further four-year term as Fed Chairman. There is, of course, a question of whether she will want to continue given the rough ride she has been given over the past year.

There appears to be little consensus among her colleagues over, not only the hikes that have already taken place, but also the future path for interest rates. Despite the support for the dollar provided by a widening interest rate differential there is some doubt that data will support a further hike this year.

The dollar index has fallen by 5.5% this year to a current level of 97.27. However, this has been almost entirely due to the unwinding of the “Trump trade” where exuberance over the new President’s economic policies has been replaced by concerns over the “Russiagate” issue.

Final Q1 GDP data will be released on Thursday. An unchanged read of 1.2% YoY is expected. This is hardly stellar but since it is simply a confirmation of the previous release the effect on the dollar will be minimal.

This week’s events of note