Dollar Looking To Thursday For Inflation Boost

England’s imminent exit from the World Cup will take place tomorrow and with it, we hope to see an end to economic football analogies. Although I will allow myself one more today courtesy of the Germans who have looked imperiously strong until their latest foray which caused concerns over the make-up of their squad. Ok, that’s enough.

Last week’s main story was undoubtedly the latest Federal Reserve meeting that gave dollar bulls an inflation shaped smack. GBP has remained above the 1.70 level against the USD over the weekend with dollar pairs slow to recover from the Fed’s unexpected bearish outlook for US inflation. Funnily enough, the most important data announcement of the week will likely be Thursday’s PCE inflation measure.

Personal Consumption Expenditure is the Federal Reserve’s preferred inflation measure and is currently running at 1.4%. This is below target but not by so much that people are seriously talking about the prospects for continued disinflation or deflationary pressures. This is the measure that, however, is only expected to have risen to around 1.7% by the end of 2016. Limits to the gains in inflation limit the possible gains in interest rates and hence the USD’s reaction on Wednesday.

Should Thursday’s number start to lead to the beginning of an increase in near-term inflation expectations then market participants will begin to bet more heavily on the USD to rise. Recent movements in other inflation measures are encouraging for dollar bulls. The most recent iteration of CPI saw core rates run higher to the highest levels since October 2012.

Overnight, preliminary PMI measures from both China and Japan have managed to limit the negativity that markets may have felt over the weekend following another barrage of rumour and news flow from Iraq and Ukraine. ISIS forces overtook a town on the Iraq/Syria border over the weekend while Shia forces loyal to cleric Moqtada Al-Sadr held a rally over the weekend in a show of defiance and made a pledge to protect holy sites from the militant threat. Oil prices remain at 9 month highs this morning but have had limited impact on prices at the pump just yet.

PMIs from Japan and China were strong in Jun, it seems, with HSBC’s measure in China accelerating from 49.4 in May to 50.8 in June. This is the first measure of growth in this metric – a number above 50.0 – in 6 months. A similar measure for the Japanese economy saw an increase from 49.9 in May to 51.1 in June, the highest level since March. Numbers from the manufacturing and the services sectors in France and Germany are due throughout the morning with a release from the US manufacturing session this afternoon.

Following the Bank of England’s latest minutes and Mark Carney’s speech 10 days ago, sterling has continued to move higher across the board. We believe that UK data will once again start to drive sterling on following 2/3 months of marginal gains. Unfortunately for sterling bulls there is a limited amount of data to do so this week although we expect to see Q1 GDP on Friday revised from 0.8% to 0.9% following improvements in services and manufacturing surveys.