Dollar Rebounds Despite Soft Inflation Data
What’s been happening?
Pound Sterling – UK Markets
The pound sterling failed to build on Tuesday gains amid the latest political developments in the UK and closed the day lower against the dollar but was able to limit its losses vs the shared currency. British lawmakers on Wednesday rejected the motion to seize the parliamentary time to try and prevent a no-deal Brexit with a majority of 11, 309 vs 298, and revived fears of the potential negative impact of a hard Brexit on the economy.
While speaking to reports on Wednesday, Boris Johnson, one of the candidates to succeed British Prime Minister Theresa May, said that he was not aiming for a no-deal Brexit but added that the threat of no-deal was a “vital negotiation tool” and that it was their responsibility to prepare for it. Ahead of the vote, opposition Labour Party’s spokesman said that they could push for a vote of no confidence against the future prime minister if no-deal is imposed. Ahead of the vote, “if we aren’t successful we will use other mechanisms to get the same outcome to prevent no deal,” the spokesman said. “Boris Johnson and other conservative candidates have made clear they are prepared to see a no deal which would be disastrous.”
US Dollar – US Markets
Despite the soft inflation data, the greenback gathered strength against its European rivals on Wednesday as the safer investment alternative. According to the monthly report released by the U.S. Bureau of Labor Statistics, the Consumer Price Index (CPI) in May fell to 1.8% on a yearly basis from 2% and missed the market expectation of 1.9% while dropping to 0.1% on a monthly basis from 0.3% in April. Further details of the publication revealed that the annual core CPI, which strips volatile food and energy prices, ticked down to 2% in the same period from 2.1%.
In the meantime, while responding to questions from reporters in a press conference in Poland, President Donald Trump said that he had a feeling that they will be able to reach a trade deal with China. However, citing sources with direct knowledge of the matter, Reuters on Wednesday reported that expectations for progress toward ending the trade conflict were low as there had been little preparation for a meeting between Trump and his Chinese counterpart Xi at the G20 Summit in Osaka, Japan.
Euro – European Markets
The euro struggled to find demand on Wednesday and erased all the gains it recorded against the dollar since the start of the week and posted small losses vs the British pound. During his speech at the European Central Bank’s conference on CESEE in Frankfurt, ECB President Draghi refrained from commenting on the monetary policy outlook. On the other hand, ECB Governing Council (GC) member and Bank of France Head Villeroy de Galhau said that the bank must keep the policy accommodative as long as they were not at the inflation target. On the same note, GC member Muller noted that they had still some room to go before reaching the 2% inflation target.
Later in the day, "There is convincing evidence that supports the view that the APP has remained a considerable source of financial easing also after the end of net purchases," European Central Bank Governing Council member Benoit Coeure noted but was largely ignored by the market participants.
What’s coming up?
UK: There won’t be any macroeconomic data releases from the UK on Thursday and investors will remain on the political headlines.
US: Weekly jobless claims and import/export price index will be featured in the U.S. economic docket.
EU: Destatis will publish Germany’s inflation data on Wednesday. The only data release from the eurozone will be the industrial production, which is expected to show a contraction of 0.5% on a monthly basis in April.