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Sterling sinks to ten month low on Brexit debate, soft inflation

The Pound slumped to its lowest level against the US Dollar since September this morning, as investors grew increasingly concerned that Theresa May would not be able to force through her Brexit plans.

May’s authority was questioned again during yesterday’s parliamentary debate. While the PM was able to win a key vote over her custom union plans on Tuesday, the debate again highlighted the growing divisions within her own party over Brexit. Governor of the Bank of England, Mark Carney, warned on the consequences of no Brexit deal during a speech yesterday. Carney claimed that no deal would be a ‘material event’ for interest rates, while having big economic consequences. Losses for Sterling were compounded this morning after inflation numbers for June missed expectations, putting a Bank of England interest rate hike in August in doubt. Headline inflation came in unchanged at 2.4%, its lowest level in a year, after investors eyed an increase to 2.6%. On Tuesday, the latest labour report showed that wage growth in the UK slowed in May, although this was due to an upward revision in the April number. Wages including bonuses increased by 2.5% on a year previous in the three months to May versus the 2.6% recorded in April. The jobless rate also came in as expected, unchanged at 4.2%, its joint lowest level in 42 years.

Upbeat Powell testimony fuels hopes of two more rate hikes in 2018

Chair of the Federal Reserve, Jerome Powell, delivered another upbeat assessment of the US economy yesterday. The US Dollar rallied by over half a percent against its major peers after Powell effectively reinforced the view that the central bank remains on course to raise interest rates at an aggressive pace during the remainder of this year and next. Speaking at his semi-annual testimony to Congress, Powell claimed that the US economy was on the cusp of ‘several years’ of strong jobs growth and on target inflation. He reiterated that the Fed would keep raising rates at a gradual pace, signalling to us that he still views two more hikes this year as appropriate. While Powell touched on the topic of protectionism, he noted that determining the impact of the looming trade war would be difficult to predict. Chair Powell will continue his testimony to Congress today. In the absence of any significant news headlines here, EUR/USD could be driven by this morning’s inflation numbers, should we see any meaningful deviation from consensus.



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