Well another day and more drama from the UK with PM May surviving yet another challenge to her Brexit plans and scrapping plans to allow parliament to go on holiday early. So its detention for the Tory rebels and misbehaviours and while May was actually defeated on the initial vote on trade deal proposals on an amendment to the trade bill, failure meaning the UK would have to join a customs union with the EU by Jan 2019. Eventually May survived with only a victory margin of just 307 to 301. Overnight there were reports the PM May threatened rebels with a summer general election if they defeated her customs plans. The pound has been facing heavy selling however and GBPUSD has entered a key support area, we’ve dropped below 1.3100 and 1.3049 to 1.3027 may provide enough support for a bounce. Failure however and we could well see GBPUSD sub 1.2800 quite quickly.
That brings us back to the data and there’s now a 77% probability that the BoE will hike rates in their August meeting. This was further supported by better than expected labour market figures but again the headline figures are not portraying the real picture. Headlines called out for the best labour market conditions in years but the reality is, more people are working for less hours and less money. This is not the foundation for a strong economy and while inflation continues to tick up (expected to be at 2.6% today) the BoE are stuck between a rock and a hard place. Inflation is once again on the rise and the headline inflation figure is supported by rising fuel prices, the core reading however is expected to remain unchanged at 2.1%. Upside for the pound might well be limited given markets are already pricing in a rate hike and a weaker inflation reading could well be a death warrant for GBP crosses. EURGBP still finding sellers towards .8900. We spiked to .8916 briefly last night, but are trading back at .8880 this am, while support lower towards .8820 is the real base for now.
Eurozone CPI also crosses the wires this morning, however despite inflation expected to rise to 2% the euro is not expected to shift. In fact the single currency has already been under the sell button this morning with EURUSD looking to trade back to 1.1613 support, a break below their targets range back towards 1.1500, but 1.1535/50 area offers fast chance of some support. It’s not just euro’s weakness that’s driving EURUSD lower but USD strength. The USD index is approaching 12 months highs once again and the greenback is firmer across the board this week, especially following the Fed Chair Jay Powell’s first testimony to the Senate finance committee yesterday. Powell stayed on track for recent Fed rhetoric regarding gradual approach to policy normalisation, in the shorter term (i.e round 2 today) this is unlikely to change so USD downside is limited.