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Dollar advances towards hazy horizon

Summary

The dollar’s rise is becoming more emphatic as markets await clues on how many further hikes there could be this year, after tonight’s.

Relax, its Fed day

Three straight days of clean gains and a fourth firm start for the dollar and 10-year Treasury yields reflect the complete absence of uncertainty about the Federal Reserve’s policy decision tonight. As such, investors are as relaxed as they can be. Key European stock markets are tilting higher after a weaker start; S&P, Dow and Nasdaq contracts are looking tentatively forwards. Beyond the hike baked in with 87% probability there is even additional policy clarity a few months ahead. Only one more 25-basis point rise is fully priced in 2018, probably in September, leaving only December, the remaining non-consecutive month with a press conference and economic forecast updates scheduled, for more tightening. Then the horizon goes hazy. As usual, the policy statement and the dot plot, will be pored over. But Fed statements are increasingly synonymous and if dot plots were as useful a tool as intended, analysts would be out of a job. Job market at full capacity? Check. Inflation holding “symmetrically” near 2%? Check. (And check out Treasury yields.) Plus, one-year rates are priced at 3.01%, 3.07% for two years’ time and 3.06% 5 years ahead. In short, we market participants would like to think we’ve got the rates outlook sewn up, but uncertainty is the only certainty. That will keep surer-footed dollar bulls looking over their shoulder for many months to come, though even minor missteps in ECB or BoJ forward guidance later in the week, could hand the greenback more momentum. This afternoon’s U.S. PPI releases are the last on the agenda before the Fed consumes all market attention tonight.

Sterling slices through in-line CPI

Such dollar ambiguity has been little help for sterling, with traders looking straight through the morning’s in-line CPI print for a month when fuel prices were rocketing. The ONS pointed to offsetting factors like a fall in computer games sales though the rationalisation does not negate the notion of curbed discretionary spending. With the triumvirate of recent official data—growth, jobs and inflation—providing grounds for disappointment, the coffin lid has been closed over any additional BoE rise this year, even if the final nail has yet to be driven home. Meanwhile, the government’s week in Westminster will get no better just yet, despite, or perhaps because of Tuesday night’s last-minute concession to Conservative rebels that defeated Brexit Bill amendments. Credit was at least as much due to the talent of party whips as Downing Street’s political adroitness. Reports of a promised new amendment, providing MPs with more say as Brexit becomes imminent splintered almost immediately, as factions spun their own versions. A Friday deadline to table a new Withdrawal Bill amendment looms, ahead of a Lords vote on Monday. A No-Deal Brexit deal is less likely, though the sense of a slow-motion car crash continues. Hence the pound against the dollar’s next move probably has the least mystery amongst majors right now as the rate accelerates to $1.33 dead, post data. The handle is part of a complex including May’s close of $1.3298, and the low at $1.3203. This implies there are few solid staging posts between $1.33 and $1.32.


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