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Dollar Index close to 1% lower

Today’s consumer prices report for the U.S. won’t be the final determinant of a rate hike at December’s FOMC meeting. However, despite Janet Yellen’s declaration that changes in monetary policy are no longer data-dependent, it would be a major shock if below trend inflation led to a rate hike.

A headline close to 2% will all but confirm a hike and then in time honoured tradition, traders will start to look towards the next hike. However, given the more dovish nature of the proposed members of the “new” Fed, a further hike could be some time coming.

Yesterday’s producer price data was stronger than expected across the board. While this is an indicator for inflation further down the road, which should encourage the hawks, consumer inflation has been under scrutiny as its future path is far from certain.

Lael Brainard, a confirmed FOMC dove spoke yesterday and outlined a plan for future rate hikes to be calibrated against a specific inflation target. While this would provide clarity, it would be difficult to implement as an overshoot of inflation often follows a period of recession or negative growth. She stressed that she remains cautious about current inflation expectations but stressed that her ideas are for future policy decisions.

A glimmer of Brexit hope?

A leaked document outlining a plan for the EU to start to work towards stage two of the Brexit process gave a late boost to the pound yesterday. Despite the conditions attached, at least it shows that Brussels feels there will be a stage two to the talks a fact that hasn’t always been clear.

Unfortunately for the U.K., those conditions are likely to be unpalatable as they will probably call for an increase in Theresa May’s offer, made recently in Florence, over the “divorce payment”.

Next week’s EU summit was supposed to ratify the progress made so far in negotiations and confirm the start of stage two. It seems following yesterday’s press conference that the two sides and moving further apart rather than coming together. Michel Barnier called the attitude of the U.K team “disappointing”. He said he was disturbed by the lack of progress while David Davis called for the EU to acknowledge the progress that has been made following May’s Florence speech.

The EU is looking for more tangible progress but the financial agreement is as far away as ever. Any offer from the EU linked to the budget payment will be considered as no offer at all and a non-starter for the UK. Whether she wanted to or not, the Prime Minister has allowed the financial consideration to be the prime measure of success or otherwise.

U.K. rate hike outlook to become clearer

Next week will see the release of two pieces of macroeconomic data that will determine the short-term path for U.K. interest rates. Inflation has been above the Government’s 2% target for so long it has almost become irrelevant. In fact, to use modern parlance 3% is the new 2%!

The most recent Quarterly Inflation Report predicted inflation to peak at 3% in October but it is probable that it will be a month early. It remains to be seen what the new report released to coincide with the MPC meeting on November 2nd predicts going forward.

Gertjan Vlieghe, the most dovish member of the MPC caused a stir recently when he agreed that a rate hike would be necessary once wage inflation started to pick up. It is likely Mr. Vlieghe will be glued to his TV set next Wednesday when the employment report is issued. Business investment is still suffering so it may be that wage increases remain below 2%.

Were there to be any breakthrough in the Brexit negotiations between now and November 2nd, Mark Carney the BoE Governor would probably lean even further towards a hike since a major headwind would be removed.

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Alan is a highly experienced banker with an in depth knowledge of Corporate Banking, Treasury and Trade Finance. He has had a varied career in Global markets, Risk management, FX Trading and Sales & Interest Rate Management. He has managed sales teams mentoring his team in both markets and marketing.He has been published in a number of journals and has appeared daily on radio to discuss market movements and events. His first novel was recently published.