Ready to take a hike

Odds on

The vast majority of market participants expect the US Federal Reserve to announce a quarter-point increase in the federal funds rate tonight. A rate hike is so deeply built into the price of the dollar that a no-change decision from the Fed would hurt it.

Over the last week the US dollar has been an average performer and that was how it looked ahead of the Fed announcement, which comes at seven o'clock this evening. Economic data from the States showed that producer prices were static in May and 2.4% higher on the year. Small business confidence was static too, according to the National Federation of Independent Business. It had been forecast to be lower.
The appearance of Jeff Sessions, the attorney general, at the Senate Intelligence Committee had no impact on the dollar. Mr Sessions was careful to say nothing provocative and relied on his faulty memory to avoid many of the questions, saying "I don't recall" or "I have no recollection".


Consumer and retail price index data put UK inflation higher than the Bank of England's 2%target and they were ahead of analysts' projections. CPI was up by 2.9% on the year and RPI rose by 3.7%. The data helped the pound towards its first winning day since Thursday.

Sterling was already on its way up when the inflation figures came out and they might have given it a little more impetus. However, investors are under no illusion that the Bank of England will take any policy action, given the uncertainty that lies ahead for the UK economy.

As shown by the price action on Friday and Monday, the pound is deep inside don't-know territory. On Monday and Tuesday there was no shortage of economic pundits telling the financial media that the pound has been oversold; driven below levels that can be justified by economic fundamentals. That is not to suppose that it must therefore rebound in the immediate future: Trends like this have a tendency to overshoot.

Spending power

Whether CPI or RPI represents the best barometer of consumer prices, both indices were higher than the last measure of average earnings, which went up by 2.4% in the year to April. That means household spending power is declining. Today's wages figure will be examined closely for signs of further erosion.
The UK employment data this morning are forecast to show an extra 10k jobseekers with the rate of unemployment steady at 4.6%. Average earnings growth is also supposed to be steady, at 2.4%. A lower number would be unhelpful to sterling.

There are EC figures today for industrial production and employment change: both should be positive but unremarkable. US data this afternoon cover inflation and retail sales. The importance of the numbers is diminished by the fact that they will be followed closely by the Fed rate decision, which will presumably have already taken them into consideration. Tonight New Zealand reports on first quarter economic growth.