Financial market research and analysis

Optimism over the US – China trade truce sent US stocks sharply higher overnight with industrials leading the charge. Supported by the likes of General Electric, Boeing and Caterpillar, the Dow charged through 25,000 for the first time since March, whilst the S&P and Nasdaq closed 0.7% % and 0.5 % higher respectively.

Whilst relations between US and China have shown signs of progress, the same cannot be said for Iran US relations. Iran flatly refusing the “very basic requirements” put forward by the US is raising tensions in the middle east and weighed on sentiment in Asia overnight; Asian stocks are lower, and Europe is pointing to a mixed start.

Dollar Pauses On Dovish Fed speak

The dollar initially climbed higher in the previous session, also boosted by easing US – Chinese tensions, before unexpectedly dovish comments from Fed speaker Harker put breaks on the recent dollar rally, giving a dose of reality to runaway interest rate expectations. Harker’s belief that there are no signs of a rapid acceleration in inflation or even a precursor to it, sent treasury yields lower, whilst pulling the dollar from 94.05, its highest-level year to date, back to 93.50.

Will BoE Carney and CPI Send Pound Down To $1.33?

The weaker dollar gave cable a respite, with the pound picking up from session lows of $1.339, back above $1.343. Over the past few sessions a lack of influential data has left the pound vulnerable to Brexit uncertainties and dollar strength; today the economic calendar starts to fill up with BoE Governor Mark Carney taking the hot seat before the Treasury Select Committee for a grilling on the May Inflation Report. The dovish report downgraded both inflation and GDP outlooks for the coming years, removing pressure from the BoE to hike rates in an aggressive fashion. Given the dovish nature of the Inflation report it wouldn’t be surprising to hear more dovish language from the BoE Governor, Carney. There may also be some questions raised about Carney’s latest ‘switcheroo’ in forward guidance. Expectations of a rate hike went from almost fully baked in to nearly completely priced out in the 2 weeks leading up to the last Bank of England decision.

Hot on the heels of Carny’s appearance, CPI figures are due on Wednesday. Whilst the headline number is expected to have remained constant at 2.5%, the core CPI is forecast to have dropped further, from 2.3% in March to 2.2% in April. Currently the markets are pricing in a 40% probability of an August hike by the BoE, should these odds drop following a dovish Carney and weak inflation reading, the pound could find itself targeting $1.33 before it even considers the GDP release on Friday.

Euro Could Struggle Following Italian Coalition’s PM Candidate Proposal

The euro capitalised on the weaker dollar, rebounding off fresh monthly lows before heading towards its first daily gain in 5 days. Any gains in the euro are likely to be limited, as Italian politics remain a clear headwind. Concerns have been rife that the new Eurosceptic, populist coalition will tear up the EU rule book, potentially putting Italy’s membership to the bloc at risk. The coalition’s choice of PM candidate Giuseppe Conte has also caused some fright, given his lack of political experience. As a result, the Italian bond market and equities traded lower again on Monday.

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