Financial market research and analysis

Trump pouring cold water over US - Chinese trade war truce optimism and raising doubts over the US - North Korea summit going ahead, sent US equities indices tumbling lower overnight. Trump’s expression of disappointment over the progress of the US Chinese trade talks, not only led investors to sell out of US equities, giving back some of the gains from the previous day, but also raised questions over the mixed messages coming from Trump’s administration.

The Dow fell 178 points, following a rally of 300 points on trade war truce optimism on Monday, whilst the S&P and the Nasdaq closed 0.3% and 0.2% respectively.

Following the double dose of US foreign relations disappointments, with China and North Korea, Asian equities headed lower over overnight, whilst the FTSE stands poised to ease back from the previous session’s record high.

GBP/USD to $1.33 on inflation data?

Not even optimism from BoE Governor Mark Carney over the outlook for the UK economy, plus the suggestion of 6 rate rises between now and 2021 from policy maker Vlieghe, was sufficient to meaningfully lift the pound in the previous session. Traders will now look for inspiration from today’s inflation figures. Last month inflation unexpectedly fell to 2.5% igniting a selloff in the pound as investors slashed the odds of the BoE hiking rates at the May meeting. Whilst CPI is expected to remain constant in April at 2.5%, core inflation which removes the more volatile items, such as food and fuel is expected to tick lower to 2.2% from 2.3% in March.

Should we see another undershoot by inflation this month, optimism of a late summer rate hike would be dented, pulling the pound lower towards $1.33. Given the pound’s inverse relationship with the FTSE, a weaker pound could help the FTSE on its way to fresh unchartered territory on target to 8000.

On the contrary, a surprise to the upside could be enough to boost the pound back towards $1.36, which would bring the FTSE back from its current lofty levels and record highs.

FOMC Minutes to boost dollar bulls?

Any impact from UK CPI data on cable could be short lived, as the FOMC minutes from the May meeting come into the spotlight.

The big debate for dollar traders over recent months has been two more hikes or three, this year? Currently there are two more hikes across the year fully priced into the market. The third hike is only 35% priced in, so any clues from the minutes of a more hawkish or dovish Fed could move the dollar. Traders will be particularly looking out for signs as to whether the Fed is willing to tolerate inflation pushing past the 2% target; indications that they are willing to see the 2% target breached could see the dollar decline as the possibility for three hikes is pushed lower. Meanwhile an indicated intolerance of inflation above 2% could lift the dollar, as this would up the odds for a third hike.

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