Sterling rallied against the US Dollar and the Euro as UK’s inflation rate jumped unexpectedly to a four-year high. Theresa May will meet today the leader of the Democratic Unionist Party (DUP), Arlene Foster, in order to discuss the terms of a deal, which will help her save her premiership. May admitted yesterday, in front of Tory lawmakers, that she is the one responsible for the Conservatives losing the majority in Parliament, but vowed to do everything possible to get the party back in the right course.

On the other side of the Atlantic, the business world is waiting to listen to the US Federal Reserve’s (Fed) decision on its benchmark interest rate. Economists expect that the Fed will raise the rate by 0.25%, which will be the second hike in 2017. However, they are doubtful if the Fed will be able to deliver a third rate hike this year, mainly due to weak inflation data.

Pound Sterling – UK Markets

Today, Sterling rallied against both the US Dollar and the Euro, after published data on the UK’s inflation and core prices showed that they rose more than expected. The Pound gained 0.35% in value against the US currency, with the exchange rate set at $1.27. The British Pound to Euro exchange rate was also driven upwards by 0.3%, set at €1.13.

Data released by the Office for National Statistics (ONS) showed that inflation jumped to 2.9% in May, 0.2% more than the 2.7% expected. As analysts noted, the Bank of England (BoE), in its May inflation report, projected that inflation would peak at 2.8% in the last quarter of the year, but it seems that it’s rising much faster than anticipated. The inflation at 2.9% is the highest reading in the last four years. The ONS suggests that the main contributor in the rate’s increase are the rising prices of recreational/cultural goods and services. Economists said that wage data, which is going to be released tomorrow, will confirm that in combination with the rising inflation, pay is shrinking in real terms.

A Reuters poll showed that two thirds of the economists asked, said that, after the election result, the danger of a hard Brexit has receded. Michele Barnier, the EU’s chief Brexit negotiator, told the Financial Times that Britain risks a hard Brexit in March 2019, if it keeps wasting time. Barnier pointed out that there has been no progress since Theresa May triggered Article 50 in March.

US Dollar – US Markets

The US Dollar retained its value against the Euro, with the exchange rate set at €0.89. Attention has shifted to tomorrow’s anticipated Federal Open Market Committee (FOMC) interest rate decision.

The Fed is expected to raise its benchmark interest rate to a target range of 1% to 1.25%. The US Federal Reserve had done a similar move in March, which was the third raise in a decade. Unemployment rate in the US has dropped to a 16-year low of 4.3% and economy is back on the track of strengthening after a weak first quarter.

However, investors are worried that the Fed’s policymakers won’t be able to deliver a third interest rate rise in 2017, as it was anticipated. The reason is that underlying inflation, which is the Fed’s preferred measure, has retreated to 1.5% from 1.8%, earlier in the year. They are also expecting to listen to what the Fed has to say about its plans to reduce its $4.2 trillion portfolio of Treasury debt and mortgage-backed securities.

Euro – European Markets

The Euro kept on gaining ground against the US Dollar for a second day in a row, trading at $1.12. While investors are expecting the Fed to raise its benchmark interest rate tomorrow, the single market currency is undermined by the lack of any tapering hints by the European Central Bank (ECB).

The Eurozone finance ministers and the International Monetary Fund (IMF) are likely to strike a deal on Greece on Thursday. The debt relief issue, which is the number one priority for the Greek government, will be left for later. If a compromise is reached, Greece will get €8bn from the ESM bailout fund to cover July’s repayments.

Standard and Poor’s (S&P) credit rating agency has revealed that it’s likely to raise its growth outlook for France, since Emmanuel Macron’s party is projected to win the second and final round of the parliamentary elections. Jean-Michel Six, who is S&P’s chief economist, said that if predictions are confirmed, political uncertainty will be removed and the newly elected French president will be able to push through his economic reforms.

Other Currencies – Highlights

The Sterling to Australian Dollar exchange rate was driven upwards at 1.68 AUD. The National Australia Bank (NAB), which is one of the four largest financial institutions in the country, published its Monthly Business Survey for May. The survey’s results point to an upbeat business sector, while it indicates an apparent disconnect with a disheartened household sector. Business conditions are still at elevated levels, despite a modest easing in May. NAB’s survey notes that employments conditions are holding up well and suggests that solid employment growth will continue over the next months.

The British Pound to New Zealand dollar remained stable at 1.75 NZD, recording a three-month high. The Kiwi shows its strength against the British currency, assisted by the vibrant economy and the stable commodity prices. However, JP Morgan’s mid-year review of the global foreign exchange market suggests that the Kiwi’s good performance won’t go on for much longer. Analysts at JP Morgan believe that the economy’s growth was weaker than expected in the second half of 2016 and expect the trend to continue for the first six months of 2017. They add that the Reserve Bank of New Zealand (RBNZ) is very cautious on the risks to financial stability from rising mortgage rates because the household debt has increased sharply in the last few years.