The modest rebound seen in equity markets yesterday shouldn’t be taken as a sign that investors are getting used to the idea of a trade war. They are probably just an indication that escalation risks still remain some way away despite the recent rhetoric between the US and China. The EU announced its retaliation measures to President Trump’s tariffs earlier this month, which will start this Friday, and could well prompt a counter response from the US in the coming days or weeks. 

Yesterday’s meeting of central bankers at Sintra Portugal didn’t offer much in the way of clues as to future monetary policy moves that we didn’t already know from Messrs Powell of the Fed, Draghi of the ECB and Kuroda from the Bank of Japan, as they merely reiterated their recent policy decisions and guidance from last week.

The pound got a lift yesterday after the UK government avoided a defeat in Parliament on a key Brexit vote, and will remain in the spotlight today with the latest instalment in the will they, won’t they, saga from the Bank of England in to when the MPC will finally throw off the shackles of indecision and policy paralysis and finally deliver on an often broken pledge to raise interest rates away from where they have been for nearly all of the last 9 years.

Having passed up the opportunity a few weeks ago to raise interest rates in May its highly unlikely that the Bank of England will do so today despite the fact that the data we’ve seen since that May meeting has been a significant improvement on the data that we saw in Q1.

It wasn’t too much of a surprise to see the central bank back pedal on market expectations in May as Governor Mark Carney had indicated as much a few weeks before at the IMF meetings in Washington a few weeks before, despite hinting heavily in February that rates could well be moved higher in the coming months.

Since that weekend in April the pound has slid sharply against the US dollar, hitting a seven-month low in the process and is down 7% from its April peaks. This should be a significant concern to the monetary policy committee in its attempt to meet its 2% inflation target, particularly since they downgraded the estimate for this year as part of the May inflation report. The downgrade also seems optimistic given the gains seen in fuel prices since last summer which should start to make their way into the headline numbers in the coming months, with the recent weakness in the pound against the US dollar not helping either.

We have seen CPI inflation come down since the beginning of the year from 3.1% to 2.4%, and while the Bank of England downgraded both its inflation and GDP forecasts last month, the overriding message wasn’t that much different from the February inflation report, while the voting patterns also remained unchanged in May with a 7-2 split with Michael Saunders and Ian McCafferty both voting for a rate increase. Today’s decision is likely to be unchanged from last months with the same splits and the consensus now shifting towards a possible move at the August meeting, which is also Ian McCafferty’s last as an external policy maker.

Markets will be looking for possible clues as to whether the MPC still has its sights set on a possible move in August, however given the number of times the Bank of England has cried wolf in raising rates it is hard to place any credibility on their guidance at this point in time.

As far as the data is concerned manufacturing has held up fairly well while the slowdown seen in the services sector in March has more than recovered in both April and May with strong showings from the consumer with the timing of Easter, two sunny May bank holidays and the Royal Wedding, while June is likely to offer a World Cup boost.

Today’s public sector borrowing numbers for May are expected to show an improvement to £5bn from £6.2bn in April.

Oil prices have continued to chop against a backdrop of a contentious deal between OPEC and non OPEC members, which Iran is resisting, to bring to an end a production cap that has been in place since the end of 2016.

EURUSD – while above the May lows at 1.1520 as well as trend line support from the 2017 lows, we remain at risk for a rebound back towards the 1.1720/30 area, with resistance also at 1.1640. A break below 1.1500 has the potential to open up a move towards the 1.1360 level.

GBPUSD – broken below 1.3200 and closing in on trend line support from the 2017 lows which currently comes in around the 1.3110 area. A break below 1.3100 opens up a potential move towards 1.2980. We need to push back above 1.3220 to retest the 1.3300 area.

EURGBP – still range bound with resistance just above the 200-day MA at the 0.8820/30 area with the recent lows at 0.8700 the next key support. A move through here opens up the 0.8640 area.

USDJPY – the reaction off the 111.00 highs found support at the 109.50 level earlier this week and could head lower if we break below this area and retest the 108.70 area. While below these recent highs the risk appears to have shifted towards the downside.

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