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Trump/Kim meeting steals headlines ahead of Fed rate decision.

By Jake Trask

Sterling yo-yoed throughout the afternoon as parliament voted on the EU Withdrawal Bill’s amendments that had been tabled by the House of Lords. The key vote over giving parliament the power to decide the terms of Brexit should no agreement be reached with the EU was voted down by 324 votes to 298 however the government conceded MPs should have input in the decision making if we reach an impasse. Sterling rose on the win however the bill now heads back to the House of Lords for further debate/amendment so the rally was short lived as uncertainty returned to grip the pound. Data-wise, wage growth numbers (including bonuses) printed in-line with expectations showing an annualised 2.5% increase in pay. Today’s big event from the UK is CPI numbers with inflation expected to hold at 2.4% y/y with a gradual move back to the 2% target by year end likely as sterling post Brexit-vote depreciation is washed out of the calculations. Cable trades around the 1.3350 handle.

US President, Donald Trump and North Korean President, Kim Jong-un’s Singaporean summit made headlines around the world yesterday and lifted risk appetite in the markets. Although the meeting was short on ink-to-paper commitments it seems to have opened doors to more friendly and open dialogue between the countries going forward, possibly laying the path to a denuclearised Korean peninsula at some point in the future. Although Kim is unlikely to lay down his nukes anytime soon the fact that the two leaders met at all is progress and further talks, possibly in Washington, could be on the horizon before the end of the year.

President Trump is reported to have called off future US/South Korean military drills which have long been a source of angst for North Korea. The meeting saw stock markets around the world rally and a key barometer for risk, USD/JPY, has got a foothold above the key 110 handle. Data-wise US CPI printed 2.8% y/y its highest level in six years adding to calls for the Fed to raise interest rates four times this year. Today’s key event will be the Feds interest rate decision which is due at 7pm this evening. Rates are all but guaranteed to be hiked 25 bps however markets will be keeping a keen eye on the message Fed Chair Jay Powell gives on future moves. Three hikes this year is still the median expectation from markets however with inflation running hot, a tight employment environment and a descaling of US/North Korean tensions the prospect of four hikes has grown over recent days.

We can expect a holding pattern in the markets today ahead of tonight’s Fed rate decision however the key event this week will be tomorrows European Central Bank interest rate decision. There is a growing expectation we will see the ECB announce a reduction/taper of its Quantitative Easing programme however the scale and timeline of the reduction is the real area of debate. Should the ECB decide to stop its asset purchases in September then we can expect the euro to soar however an extension at a reduced rate possibly ending at the end of the year is the more likely outcome. The one data-set of note yesterday was German ZEW Economic Sentiment figures which showed a further drop into negative territory to -16.1 from last month’s -8.2. EUR/USD trades at 1.1750 and GBP/EUR sits at 1.1360.

The Aussie dropped back below 76 cents yesterday evening as the US dollar caught a bid on higher than expected CPI from the States. The Aussie remains under the big number as Reserve Bank of Australia Governor, Philip Lowe highlighted persistently low wage growth as a headwind to the economy in a speech in Melbourne. Employment data is due from Down Under tonight with a drop in unemployment to 5.5% penciled in. GBP/AUD sits at 1.7620.

A well bid dollar and a slight fall in oil prices mean USD/CAD remains above the 1.30 handle with a move to 1.31 likely should we get a hawkish signal from the Fed this evening re: future rates hikes. There is little data for the rest of the week from Canada so Trump/Kim, Fed and the ECB will be the main catalysts for the loonie. GBP/CAD is at 1.7375.

Despite a dollar rally over the past 24 hours, NZD/USD is clinging on to the 70 cents handle however this could easily break should the Fed indicate four hikes are on the cards this year. Like the loonie, the Kiwi will react to external factors for the rest of the week with little domestic data to worry traders. GBP/NZD sits at 1.9020.