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UK CPI and FOMC minutes in focus

Italian markets got a brief respite yesterday, closing higher along with the rest of Europe’s markets, with the FTSE 100 making yet another record high, helped by the report that China was going to reduce its import tariff on motor vehicles from 25% to 15%, as the trade tension rhetoric got dialled back further.

This optimism didn’t see out the day as it became apparent that a lot of Republicans were unhappy at some of the concessions being reported, particularly in respect of Chinese telecoms company ZTE, and were seeking to block them if they came about.

This unease appears to have prompted President Trump to dial back his optimism about the outcome of the ongoing talks, while he also suggested that next month’s summit with North Korea might also fail to take place. This could well be a case of expectations management on the part of the US president, but nonetheless US stocks quickly reversed course, finishing the day in the red, and this looks set to translate into a lower open in Europe this morning.

One of the main conclusions that one could draw from yesterday’s inflation report testimony was how differently Bank of England policymakers see the UK economy, and that’s even before we look at the Office for National Statistics, where they differ on the overall effects of the cold weather on the UK economy in Q1, with the ONS insisting the effects were “limited”, while the central bank said it was “ significant”.

Irrespective of who believes who, the fact remains that we did see a slowdown. However, Bank of England governor Mark Carney was insistent that the reasons behind last month’s U-turn were purely down to concerns that the recent slowdown might not be temporary. He went on to claim that UK households were up to £900 a year worse off on account of the Brexit vote. Even if you accept that figure as accurate, the claim rather conveniently overlooks the fact that it was the central bank’s ill-considered August 2016 rate cut and QE increase that may well have contributed to some of that financial hit to UK households in terms of higher inflation.

There does appear to be some evidence that inflation might now be starting to come down a little, while at the same time we are also starting to see recent wages data starting to edge higher. Last week we saw wage growth excluding bonuses rise by 2.9%, which means that after more than a year prices are now rising at a slower pace than wages, albeit only when compared to the headline CPI measure.

At its recent inflation report the Bank of England came across as rather dovish about the prospects for both wages and inflation, downgrading its forecasts for both. It is true that CPI has fallen from 3.1% to levels of 2.5% in the latest March numbers, but it still seems rather early to predict that the recent upward pressure on prices is likely to ebb given that in the April numbers alone we’ve seen council tax go up, pension contributions increase on an annualised basis, while petrol prices have risen from £1.20 a litre at the beginning of the year to about £1.25 now, while oil prices have now moved above $80 a barrel.

It would be surprising if today’s April inflation numbers reinforce the Bank of England’s view that prices might fall further immediately, and today’s expectation is that we’ll see it come in unchanged at 2.5%. But in the long term it is hard to see how the bank can be anything but mistaken in its view that CPI can fall back to target as quickly as they think it will. Everywhere you look prices appear to be rising, something that doesn’t appear to be registering with central bankers, or in the headline CPI numbers.

We’ll also get sight of the latest Fed minutes from the last meeting earlier this month. There wasn’t too much in the way of surprises from the statement, apart some minor tweaks to the language with respect to inflation. This was changed to reflect the much firmer headline numbers seen at the end of last month, with “run below” changed to “moved close to 2%”, while the reference to “monitoring inflation developments” was removed completely, as was the reference to the economic outlook strengthening in recent months.

The Fed’s outlook on the economy was surprisingly ambivalent, suggesting some concern about a possible slowdown later on in the year. Today’s minutes should give us a greater insight into whether policymakers do have concerns about the recent slowdown in the US economy and whether the recent rises in oil prices are giving them any concerns about consumer spending, as well as inflation.

It does appear that some US policymakers are concerned. Loretta Mester, the Cleveland Fed president, yesterday expressed her view that inflation could overshoot, either as a result of the fiscal stimulus, or rapid increases in cost price inflation as a result of recent rises in energy prices.

Forex snapshot

EUR/USD – yesterday’s rebound from the 1.1710 area ran out of steam at the 1.1830 area. The current rebound could extend towards the 1.1900 area in the short term, but the risk remains for further losses towards the 1.1600 area. With the 200-day MA now starting to roll over the prospect of further losses looms large, while below 1.2000.

GBP/USD – the rebound from 1.3390 ran out of steam just below 1.3500 yesterday, however to stabilise we need to recover back above the 1.3620 area to avoid the risk of slipping back towards the 1.3300 level.

EUR/GBP – the rebound from the 0.8710 area needs to push back through the 0.8800 level to look at a retest of the 0.8845 level and the 200-day MA at 0.8870 A failure to do so keeps the onus on the risk of a return towards the 0.8690 level, and even the recent lows at 0.8640. Still range trading.

USD/JPY – while above the 110.70 area the risk remains for further gains towards the 112.00 area. Below 110.60 argues for a retest of the 110.00 area and the 200-day MA. Only a move below the 109.70 area undermines and risks a return to the 108.70 area.

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