All those concerns about monetary policy divergence at the beginning of the year, as markets speculated about the timing of further moves by the Federal Reserve to tighten monetary policy, appear to be back on the table again after a rather hawkish set of minutes from the most recent central bank policy meeting.

Having removed the reference to global financial developments as an ongoing risk in its last statement, and with Fed Chief Janet Yellen having suggested in comments prior to that meeting that the Fed was more than happy to proceed cautiously in terms of raising rates, given recent weak data, markets had probably become overly complacent about the prospect that the Fed wouldn’t raise rates in June.

It would appear that the improvement in the economic data in the past week or so along with last night’s minutes appears to have disabused markets out of this mistaken assumption, with the result that the probabilities of a move in June have risen from 4% to an almost one in three chance that rates could rise. With Fed vice Chair Stanley Fischer due to speak later today that percentage could rise further given he tends to lean to the hawkish side.

This sudden change of tack appears to have caught markets in two minds, helping boost banking stocks in the expectations that the yield curve will become less flat, but at the same time has raised the same concerns that we saw at the beginning of the year that the Fed might be acting too hastily, if it does move in June.

It is important to note that while the Fed removed the reference to ongoing risks with respect to global financial developments, it didn’t say that the Fed wouldn’t be monitoring them and there are still plenty around including the disappointing April data from China, as well as the forthcoming UK referendum on the EU, which takes place 8 days after the June FOMC meeting, which means any potential rate move could well get pushed into July, especially if the UK opinion polls tighten up in the lead-up to the vote.

Overall though Fed officials are likely to be happier with the direction of travel with respect to market expectations around a possible move on rates given their recent complaints that markets were under-pricing the possibility a week or so ago.

While the UK referendum may still stay the Fed’s hand yesterday’s opinion poll in favour of the “Remain” camp could embolden the Fed to move early if yesterday’s direction of travel in favour of staying continues.

Yesterday’s UK data appeared to show that despite all the heat and very little light coming out of the referendum campaign the UK labour market remained remarkably resilient, with record numbers in work, while wages growth came in at a fairly resilient 2%.

Today’s economic data looks set to give us a decent insight into the spending patterns of the UK consumer after two months of disappointing February and March retail sales numbers, which showed a combined decline of 1.8%. Expectations are for a 0.6% rise in April, though there is a worry given recent negative headlines surrounding the problems of Austin Reed and BHS that we could see another disappointment.

In the US the latest weekly jobless claims saw a big jump last week to 294k raising concerns that this number which has been near multi year lows could be starting to edge up again as the US economy slows. Today’s number is expected to come in at 276k.

Earlier this week the May Empire manufacturing survey unexpectedly dropped back into contraction after a decent pick up in April, raising the question as to whether the April rebound was simply an aberration. A similarly disappointing May Philadelphia Fed manufacturing survey will only serve to reinforce that perception. Expectations are for a recovery to 3.2 from -1.6. 

EURUSD – we’ve seen a drift back to the April lows at 1.1215/20, and a break here could well open up a move towards trend line support at 1.1110 from the December lows, and even the 1.1030 area. We need to see a move back through 1.1430 to stabilise.

GBPUSD – the pound continues to remain supported pushing through 1.4530 and above 1.4600 as we look to retest the highs this month above 1.4700, and close in on the 1.5000 area. Pullbacks should find support at 1.4520 and the recent lows at 1.4330.

EURGBP – having broken below the 0.7760 neckline support area the way looks clear for a move towards the 0.7500 area, on a break below the 0.7680 area. The 0.7770 area should now act as resistance.

USDJPY – the US dollar continues to squeeze higher through the 110.20 area and could well head back towards the 111.00 area, throwing the prospect for a move back to the 106.00 area into doubt. We could head all the way back to the 113.00 area without undermining the recent downtrend, though that isn’t the preferred option.

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